Third Quarter Recap: Earnings Will Warm Your Heart

At this point, we are pretty much finished with the third quarter earnings season and for the most part, it was a good quarter for earnings. According to the LipperAlpha Earnings Dashboard, 490 of the S&P 500 constituents have reported earnings through December 4. That means 98% of the results are in.

Expectations for the quarter were somewhat tempered with the trade war lingering over a number of companies. Analysts seemed to take the trade war in to account with their earnings estimates and were a little conservative with their estimates. Heading into the quarter, estimates were for a decline of 0.4% compared to Q3 2018. The overall estimates were dragged down quite a bit by the energy sector. If we excluded the energy sector from the estimates, earnings were expected to grow by 2.2% overall.

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With 490 of the 500 companies already reporting, 75.3% have beaten their EPS estimates. That percentage is higher than the historical average of 65% and it is higher than the 74% average over the last four quarters.

Looking at the different sectors individually, the consumer staples sector saw 90% of its members beat expectations and that was the highest percentage of the 11 sectors. The healthcare sector saw 88% of its constituents beat EPS estimates and that was second best. The tech sector was third with 87% of reports beating estimates.

On the other end of the spectrum, we saw only 53% of the reports from the real estate sector beat estimates and that was the lowest percentage to beat. The energy sector was just behind real estate with only 54% beating—and that was with really low estimates for the sector. The materials sector saw 57% of members beat estimates and that was the only other sector below the historical average of 65%.

Revenue reports didn’t provide as much good news as earnings. According to the LipperAlpha report, only 58.2% of companies beat their revenue estimate and that is below the historical average of 60% and it is slightly below the past four quarter average of 59%.

Revenues were expected to increase by 3.8% and once again the estimates were dragged down by the energy sector. If we excluded the sector, the overall estimate was for revenue growth of 5.2%.

Two sectors in particular really stood out for missing the revenue estimates. Only 14% of utilities stocks beat their revenue estimates while 86% came up short. The materials sector saw 29% beat revenue estimates while 71% missed.

The healthcare had the highest percentage of companies beat at 81%. The financial sector had the second highest percentage of companies beating revenue estimates at 76% and the tech sector was third best at 75%.

The big banks will start reporting again in the second full week of January which means we are a little over a month away from the beginning of the fourth quarter earnings season. Looking ahead to that earnings season, the current estimates are for overall earnings to decline by 0.1% and if the energy sector is excluded earnings are expected to grow by 2.1%. Revenue estimates show expected growth of 3.9% and that figure jumps to 5.3% if energy stocks are excluded.

I would say that the third quarter earnings season was a success overall. Yes, there were big beats and big misses along the way, but with the overall number of companies beating above the historical average, it should be considered a success.

One area of concern from my own perspective was regarding momentum oriented stocks. There seem to be a number of these companies that issued forecasts that were below estimates and we saw several sizable price drops as a result. This is something investors will want to keep an eye on going forward.

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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