Q3 Earnings Season Enters the Final Stretch - November 11, 2019

We’re well into Q3 earnings season. While the numbers have been mixed, most companies have topped a low hurdle, which has eased worries about the economy and has pleased investors.

Let’s dive in. With 89% of S&P 500 companies having reported Q3 earnings, profits are expected to fall 0.5% versus one year ago (Refinitiv, a blend of those who have reported and estimates for those who have yet to report). Down 0.5% – it’s nothing to write home about.

Let’s look at some of the reasons. We’ll start with the negatives before wrapping up with the positives.

  1. U.S. economic growth has moderated versus a year ago. On the international front, the economic slowdown has been more pronounced. According to FactSet, we’re seeing much weaker performance from the multinationals vs companies that conduct most of their business in the U.S.
  2. The U.S. dollar is stronger this year compared to a year ago. For firms operating internationally, overseas sales must be translated into a stronger dollar, which chips away at revenues and profits.
  3. Oil prices are down vs a year ago. According to Refinitiv, earnings at energy companies are expected to decline 38%. It’s the worst-performing sector. Remove energy, and S&P 500 profits are expected to rise 2.1% in Q3.
  4. Revenue is forecast to rise 3.9%. Since revenues are outpacing earnings, higher costs are biting into profit margins. Still, rising revenue is a signal the economy is expanding.

The silver lining

As we’ve seen before, analysts were too pessimistic heading into Q3 earnings season. At its worst, analysts had expected profits to fall 3.2%. As we head into the final stretch, earnings are down 0.5%, as previously mentioned.

More importantly, 74% of companies have topped analysts’ profit estimates, according to Refinitiv. That’s in line with the average over the last four quarters and is ahead of the long-term average of 65%.

What this tells us is that investors were too cautious heading into earnings season, and analysts were too pessimistic. But it’s been a common trend for much of the economic expansion.

Another takeaway—the U.S. economy expanded in Q3. Coupled with optimistic trade headlines, better-than-expected earnings have helped push the major market averages to new highs last week.