S&P 500 Earnings Report Card: Mid-Season Results

We are just over halfway through the third quarter earnings season and, as is always the case, there have been positive and negative surprises. But overall, how are companies doing?

Through October 30, 279 members of the S&P 500 had reported. Of those reporting, 77% had beaten their EPS estimates, 9% had matched, and 14% had missed. The 77% beating estimates matches the average over the past four quarters.

One area where companies have not been doing as well is with revenue estimates. Of the 279 that have reported so far, 57% have beaten and 43% have come up short of their revenue estimates. The average over the last four quarters has shown 73% of companies beating on their revenue estimates and the long-term statistics show 60% of companies beating revenue estimates.

I took note of the trend of revenue misses due to the FAANG stocks. Facebook, Amazon, Apple, and Google (Alphabet) all missed on their revenue estimate with only Netflix matching its estimate.

Looking at the sectors and how they have done so far this earnings season, the tech sector has seen 34 of 66 companies report and 91% have beaten their EPS estimates and 65% have beaten their revenue estimates. That is the highest percentage of EPS beats of any sector.

As for the highest percentage of revenue beats, the communication services sector has seen nine of 22 companies report and 78% have beaten on their revenue estimates and 89% have beaten their EPS estimate.

To make it easier to tell which sectors are experiencing better results than the S&P and which ones are disappointing, I put together the following table.

As you can see the energy sector has been the most disappointing so far, but only 11 out of 30 have reported so far, so that could change. Three other sectors are below average on both earnings and revenue and they are consumer discretionary, consumer staples, and industrials.

Overall I think you would have to say that communication services, tech, and healthcare have been the top three sectors as far as being above average on both earnings and revenue.

How have the earnings and revenue results impacted performance so far? Since October 12 when this earnings season kicked off, the energy sector has been the worst performing sector, dropping 5.65%. That matches what we saw in the earnings table, but the leading sector has been the consumer staples sector with a gain of 7.12% and that doesn’t match what we see in the table.

The industrial sector has been one of the more disappointing sectors in terms of the earnings and revenue reports and it is the second worst performer with a loss of 2.79% over the last three and a half weeks.

What really caught my attention on the sector performance chart was the bunching of seven different sectors—all bunched between 0% and 1.75%. With the market losing ground in October and only two sectors gaining ground during the month, I was surprised to see eight sectors in positive territory since the start of earnings season.

So what does all of this mean for investors? Seeing the percentage of companies that are beating EPS estimates in line with the last four quarters is somewhat of a relief. With the way the market was performing at the beginning of October, I was concerned that we could see a major selloff.

The fact that revenue estimates seem to be lagging historical averages is a bit of a concern. This could be a preliminary indicator that the economy is growing at a slower pace than what economists have predicted. Earnings growth essentially comes from one of two places: revenue growth or cost cutting. If the growth is coming from revenue growth that is a much better sign for the overall economy than if the growth is coming from cost cutting.

We are only half way through the earnings season, so there isn’t any reason to panic and it is only one quarter of data. However, if this trend continues throughout the rest of this quarter and then carries over to the next earnings season, this development could be a bigger concern.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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