With most of the S&P 500 having reported results, the third quarter earnings season turned out to be very solid. Not only has the earnings momentum we spoke about in the last Lookout Report continued, but margin performance remains elevated, and beat rates are at historically high levels. Currently analysts expect earnings growth for the third quarter of 8.9% and earning per share of $29.97. That compares to expectations for an increase of only 6.7% at the start of earnings season on October 1st.
If we dig into the sector performance, the magnitude of increases in earnings growth rates for the materials, health care, energy, and industrials sectors has been quite impressive. In fact, it is somewhat surprising that the more economically sensitive sectors have not been held back by the subpar U.S. economic recovery cycle.
Change in Sector Growth Rates Since October 1st
Source: S&P Capital IQ
- Positive earnings surprises have been a key characteristic of the quarter, which at a rate of 74%, is far outpacing the historical rate of 64%. This is a good indicator of the strength of the quarter.
- Margins have been a large contributor to that performance. Third quarter margins estimates currently stand at 9.8%, vs. the ten-year average of 7.6%. Margins have easily remained above 9.5% since the second quarter of 2013, driven by cost controls and technological advances.
In Europe, the S&P Euro 350 continued a choppy recovery after reaching a low in October. Last week, European Central Bank President Mario Draghi said he is willing to deploy additional stimulus if necessary. This statement came after the European Union downwardly revised its growth forecasts for the region earlier in the week.
- Despite that, earnings growth outlook remains robust at 9.6% for 2014. Technology and financials continue to lead growth this year, while the defensive sectors lag.
Looking beyond 2014, double-digit earnings growth rates remain the S&P Capital IQ consensus both domestically and 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.