For The First Time In 19 Months, More Companies Are Cutting Than Raising Revenue Guidance

Confirming investor concerns about “peak profits”, the first cracks in US corporate earnings are starting to appear.

On one hand, Q3 earnings season has been impressive: with 75% of the S&P 500 having reported their results so far, 82% percent of companies have beaten consensus expectations on profits, while 61% have beaten on revenue. Earnings growth is running at a solid +26.5% yoy pace in aggregate, a robust pace, while sales are growing at a +8.79% yoy pace.

And yet, some profit outlooks have been more negative than from recent quarters which has taken the shine of the good headline numbers.

Specifically, as Bank of America calculates, in October, the three-month earnings revision ratio (ERR) fell to 1.11 from 1.32, the lowest level in nearly a year, confirming that the ratio of earnings raises to cuts is crashing down to earth from its recent record post-tax reform highs. While revision trends continue to decelerate from early 2018 highs, the ratio remains above its long-term average of 0.87, signaling strong returns at least in the short-term.

More concerning is that the more volatile 1-month ERR crossed below 1.0 for the first time in two years, to 0.77 from 1.18, prompting BofA to ask if “this the beginning of a longer trend of estimates cuts?”

Meanwhile, while this breadth ratio has weakened, consensus 2019 EPS has drifted down just 0.4% during earnings season in October-less than half the post-crisis average estimate cut over the same period. Which probably means that sell-side analysts are only now going to start slashing their longer-term forecasts.

Broken down by industry, all sectors except Energy saw their 3m ERR decline, while Financials remained flat. Real Estate, Industrials, and Health Care saw the biggest deterioration. Despite the broad-based moderation, most sectors’ (except Staples, Materials, and Comm Svcs) 3m ERR is still above 1.0, suggesting more raises than cuts to earnings estimates. The ERR is also still above average for Health Care, Industrials, Discretionary, Tech, and Utilities.