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.
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.