Third-quarter earnings season has officially come to an end. The S&P 500 closed the quarter with earnings per share growth of 9.2% reaching $30.04. That was significantly better than the 4.5% EPS growth expectation going into the quarter and the beat was a high quality one, with sales growth of 2.9% and a 9.8% margin rate. Notably, 74% of companies beat their earnings estimates, well above the historical rate of 64%.
The consumer discretionary sector was the focus over the last few weeks as they typically bring in the rear of earnings with their quarter ending one month later than the rest. The Black Friday weekend also helps to bring this sector to the forefront this time of year. The weekend was characterized by deep discounts, intense competition and disappointing sales results.
- The third-quarter certainly had its share of disappointing results from the retailers, with retailers like Amazon, Urban Outfitters, Kohl’s, CarMax, and Family Dollar significantly disappointing largely in part given their exposure to the lower and middle income consumer who continues to struggle with the slow economic recovery.
- Though there were some bring spots as well. Best Buy, Ford, Nike and Macy’s were able to perform well in the quarter primarily because they had highly sought after products. The media companies also outperformed in the quarter.
- For as much as the discretionary sector has against it, such as limited wage growth, cautious consumers focused on maintaining a deleveraged balance sheet and less on spending, higher share of wallets going to health care costs, and slow credit creation, the sector overall reported better-than-expected results in the third-quarter. EPS growth in the third-quarter rose 8.4%, nearly in-line with the overall Index and above the initial 5.9% estimate.
In Europe, the S&P Euro 350 continued its rebound despite economic data that remains unstable. Quarterly GDP growth in the euro zone remained below 0.5%, unemployment is above 11% and inflation is hovering around 0.4%, far from the European Central Bank’s 2% goal and nearing deflation.
- The earnings growth outlook however remains robust at 9.8% for 2014. Technology and financials continue to lead growth this year, while utilities and consumer staples lag.
- Looking beyond 2014, the S&P Capital IQ consensus expects 9.3% earning s per share growth in 2015 in the U.S. and for growth of 10.4% in Europe. GMI Research remains bullish on the U.S. economy and the outlook for the equity market in the coming year, and the impressive third quarter earnings results provide a solid foundation to support this call.