Q3 Earnings Look Great So Far
This is the first week where earnings summaries include a significant portion of reports from Q3. As of the end of last week, 17% of S&P 500 firms reported earnings. According to S&P Dow Jones, the insurance firms’ hurricane weakness caused Q3 financial sector earnings to fall from $7.04 to $6.17. Last year’s earnings were $7.00, so this will be a sharp decline of 11.9%. The claims on insurance are expected to have a $0.75 effect on total S&P 500 earnings which still allows it to hit a record. However, the effect won’t only come from the insurance industry; it might not be a record if other sectors also have more of an impact than expected. On an as reported basis with 21.5% of reports in, the bottom up Q3 blended earnings are expected to be $28.33. The previous record was $27.47 in Q3 2014.
Looking at the earnings break down, this is the 3rd to last quarter where energy will have easy comparisons. Energy is expected to make a 3.63% contribution to S&P 500 earnings in Q3 2017 which is much better than the 0.92% contribution it made in Q3 2016. Technology is also taking a big step up this quarter as 21.77% of earnings will be from that sector which is above last year’s 18.48% contribution. Because of the weakness from insurance providers, financials are expected to have a 16.71% contribution which is down from 21.07% last year. In Q2 the S&P 500 had operating margins of 10.14% which was 4 basis points above the record. This quarter is expected to have margins of 10.36%. It is being dragged down by financials. The margins from the big tech firms will determine what Q3 looks like. This is a big week as Twitter, Amazon, and Alphabet are all reporting. The iPhone X will be available for pre-order on Thursday and will go on sale on November 3rd. It’s the biggest product launch of the year when looking at all S&P 500 firms.
Out of the 87 firms which have reported earnings in Q3, 67 beat expectations, 11 missed, and 9 met expectations. 60 out of 86 firms beat sales estimates. As per usual, the financial sector has the most firms which have reported so far. 25 financials have reported, with 20 beating, 2 missing, and 3 meeting expectations. 17 firms in the industrials sector reported earnings with 13 beating, 2 missing, and 2 meeting expectations. The chart below compares Atlanta Fed GDP Now estimates for final demand with the S&P 500 industrials enterprise value to trailing twelve month EBITDA. As you can see, there has recently been a sharp divergence, meaning the stocks are expecting a sharp pickup in demand. If it doesn’t occur, the stocks will fall. While it’s possible the latest GDP Now estimate could be wrong, it already has GDP growing at 2.7% which is above the blue-chip average, so it’s doubtful it’s too pessimistic.
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