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Cyclicals Driving Q3 EPS Growth Upside

Earnings momentum for the S&P 500 is really picking up as we cross the halfway point of third quarter earnings season. Currently analysts are looking for third quarter earnings per share of $29.47, which represents a growth rate of 7.1%. That compares to expectations for an increase of 5.5% just two weeks ago. Overall, Global Markets Intelligence (GMI) Research team here at S&P Capital IQ still believes third quarter earnings will end up being in 7-8% range. 

Estimated Third Quarter 2014 Earnings Per Share and Growth Rates

If we dig into the sector performance, it is interesting to note that the cyclical sectors are leading the current improving growth trends. Both the Industrials and Materials growth rates are up 300 basis points in the last two weeks. Despite that, the stock performance of these groups remains subpar for the year.  

Upside surprises across sectors has been impressive. 76% of the 303 companies that have reported so far have beat estimates, well ahead of the historical beat rate of 64%. This is a good sign that we will continue to see upward revisions to the third quarter earnings growth rate. 

The only concerning trend in the quarter is the slight deceleration in sales growth expectations to 3.3%, from 3.8% two weeks ago. Operating efficiencies have been able to compensate for sales misses for many corporations this quarter, but accelerating revenue growth will be essential in driving earnings in 2015 and beyond. 

In Europe, the S&P Euro 350 was able to recover a bit in the last two weeks after reaching a year-to-date low at mid-month.

Despite continued volatility in the European markets, the earnings growth outlook remains robust at 9.5% for 2014. Technology and financials are expected to lead this year, while the defensive sectors are expected to lag, similar to the trends we are seeing in the US.

Looking beyond 2014, double-digit earnings growth rates remain the S&P Capital IQ consensus both domestically and in Europe. While we continue to remain bullish on the outlook for the U.S. economy and the equity market overall, a sluggish global economic environment could weigh on these forward looking expectations. As such we will keep a close eye on economic data for clues into the direction of corporate earnings prospects.

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