Third quarter earnings season is officially underway after JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) kicked things off this morning with largely in-line results.
According to FactSet, third quarter earnings per share in the S&P 500 are expected to grow 19% year-over-year with revenue up 7% (estimate data was pulled on Wednesday afternoon). Earnings grew 7% with revenue up 6% in the third quarter of 2017. Second quarter earnings grew 25%, the highest level since the third quarter of 2010, when we were still recovering from the Great Recession. Second quarter revenue grew 9.9%. A slowdown in growth is not surprising coming from such a high level in the second quarter. Earnings tend to come in modestly higher than Wall Street's projections heading into the reporting season.
S&P 500 earnings are expected to grow for the ninth straight quarter. What's more, all twelve sectors are expected to report earnings growth for the fourth consecutive quarter.
Strong economic growth helped by the Tax Cuts and Jobs Act continue to boost corporate profits. Still, third quarter earnings before interest expense and taxes (EBIT) are expected to grow a robust 13.5%.
Third quarter earnings growth expectations by sector: Energy +97%, Financials +34% Materials +25%, Communication Services +19%, Information Technology +17%, Industrials +15%, Consumer Discretionary +11%, Health Care +9%, Real Estate +6.5%, Utilities +6%, Consumer Staples +5%.
- Note that two weeks ago, Standard & Poors reconstituted sectors in the S&P 500. As a result, social media stocks including Facebook (FB) and Google (GOOG/L) left the Information Technology sector and traditional media stocks left the Consumer Discretionary sector to join telecommunications stocks in a newly formed Communications Services sector.
Excluding the Energy sector, which accounts for just 6% of the S&P 500's market value, third quarter earnings are expected to grow a still healthy 16.2%. Information Technology is still the largest sector with a 20% weighting, followed by Health Care (15%) and Financials (14%), while Communications Services, Consumer Discretionary and Industrials all come in just under a 10% weighting.
October has been somewhat of a rude awakening for investors. Despite strong corporate results, there are reasons to be cautious going forward.
It seems rather likely that earnings and economic growth have peaked. Fiscal stimulus creates difficult comparisons heading into 2019. What's more, the Federal Reserve's monetary policy is no longer accommodative as it continues to hike rates.
Some companies have already lowered expectations as a result of higher unit costs and trade uncertainty. Tariffs and a slowdown in China are impacting demand and increasing costs. Higher raw materials costs, wages and interest rates are looming over margin and earnings forecasts. Coating and paint giant PPG (PPG) warned about results this week, citing raw material and logistics costs, weakness in China and from the auto sector.
More than 5% of the S&P 500 has already reported quarterly results and 75% have traded lower in response even though 83% have exceeded earrings estimates and 62% have exceeded sales estimates. Back in April and May, we saw 53% of the S&P 500 trade lower following first quarter results despite 79% beating earnings estimates. Evidently, those strong results had already been priced in to the market.
Fourth quarter earnings per share are expected to grow 17% with revenue up 6.5%. Estimates for the following quarter tend to come down during earnings season as companies set the bar to an appropriate level, leaving room for upside three months down the road.
Looking at 2018 as a whole, earnings are expected to grow an impressive 20% with sales up 8%. That comes on top of 11% earnings growth with revenue up 6.5% in 2017. Earnings and sales are expected to grow across every sector for the year.
At this point, the market is more concerned with prospects for 2019. Looking out to next year, EPS are expected to grow 10% with sales up 5%.
According to S&P Capital IQ, the S&P 500 trades at just under 18x adjusted earnings estimates for this year or just over 16x adjusted earnings estimates for next year.
Next week will feature the rest of the large banks and some other heavy-weight companies but the volume of earnings will remain relatively light. Three very heavy weeks of earnings reports will follow before volume tapers off in mid-November when retail earnings season picks up.
Notable earnings out next week include:
- Monday: Bank of America (BAC)
- Tuesday: United Health (UNH), Johnson & Johnson (JNJ), Goldman Sachs (GS), Morgan Stanley (MS)... Netflix (NFLX), IBM (IBM), United (UAL), CSX (CSX), Lam Research (LRCX)
- Wednesday: Abbot Labs (ABT), US Bancorp (USB)... Alcoa (AA)
- Thursday: Novartis (NVS), Phillip Morris (PM), Nucor (NUE), SAP (SAP), Blackstone (BX)... American Express (AXP), PayPal (PYPL), Intuitive Surgical (ISRG)
- Friday: Procter & Gamble (PG), Honeywell (HON), Schlumberger (SLB), V.F. Corp (VFC)