Third quarter earnings season is upon us. The unofficial kick-off will occur on October 8th when Alcoa releases results. Thus far, the early reporters have set a positive tone as 78% of the 18 companies that already announced results beat the consensus estimate. Particular standouts include Lennar, Darden Restaurants, General Mills, ConAgra Foods, and Nike, which all beat expectations by double digit percentages.
Although that paints a pretty picture on the surface, a number of familiar headwinds (like commodity prices and the strength of the dollar) will weigh on the overall S&P 500 Index in the quarter. As such, total growth for the S&P 500 is expected to decline 4.8% to $28.63, representing the first decline in earnings since the third quarter of 2009.
Third quarter estimates have been cut sharply since earlier in the year, even as economic conditions showed resilience after the first quarter concluded. Growth for Q3 was 1.5% as recently as March 31st. Despite outsized beats for the first and second quarter, third and fourth quarter estimates continued to be reduced. Initially, earnings growth was expected to trough in the second quarter, but that was pushed out as companies began releasing their Q2 results. We will be watching to make sure that bottom doesn’t get pushed out once again.
Revenue performance has been quite weak for the last few quarters, and Q3 is expected to be the third quarter in a row for the S&P 500 to post a decline on the top line. Fortunately, margins that remain near peak, along with buybacks, help to support bottom line growth for a number of industries.
Ultimately, the key to this earnings season and market direction going forward will be guidance for the final quarter of the year. If outlooks are not raised, we would like to see management teams confirm prior guidance to help mitigate the continuous decline in next twelve month earnings expectations that has been the trend all year long.
Please see our report titled “Searching For Direction From Q3 Earnings” for a more detailed analysis, including a deeper dive into earnings and revenue growth by sector, a breakdown of foreign sales by sector, and historical average earnings beat rates and what it means for the earnings trajectory going forward.