According to Credit Suisse’s 3Q 2015 EPS Scorecard, EPS growth for U.S. public firms is likely to bottom out this quarter and then move up for at least a year or so. The September 25th report from CS’s Lori Calvasina and team says that signs point to increased earnings growth for U.S. stocks into the third quarter and beyond.
Preview of 3Q 2015 earnings season – EPS growth moving up
Calvasina et al argue on a bottom up basis, EPS growth should hit bottom in the third quarter of 2015 (CS models 2.0% for large caps, 4.5% for mid caps and 6.4% for small caps), and begin to re-accelerate through at least the third quarter of 2016.
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The CS team also notes that at the sector level, EPS growth in the third quarter is anticipated to be highest for Consumer Discretionary, small cap Health Care and large cap Telecom Services sectors. That said, expectations are lowest for the Energy, Materials, large cap Staples, large cap Industrials and small cap Telecom Services sectors. They also note that firms with international exposure have pulled down EPS growth expectations (EPS growth is likely to turn negative in the third quarter for both small & large caps with significant international revenue exposure), and a slight slowdown is expected even for enterprises with little to no global revenue exposure.
Although broader EPS growth was initially expected to trough in the current quarter, the bottoming out was was delayed until the third quarter as more companies reported results. Keep in mind that while trailing 12 month EPS growth estimates for 2015 are generally unchanged, 2016 estimates have started to come down for the S&P 500 index, dropping from 11.0% as of July 17th to 9.9% on Sept 18th. Of some comfort is the fact that EPS growth estimates for 2016 have hung in there for small and mid caps, but they have also begun to slip as of midsummer.
Calvasina and colleagues note they “will be watching growth expectations closely during 3Q15 reporting season to see if near term expectations for a bottom in EPS growth stick or are pushed out again.”
Finally, 2016 analyst EPS growth estimates at the sector level have been slashed for small and large cap Energy. Other sectors saw small reductions, but 2016 earnings growth expectations for Consumer Discretionary, large cap Tech and large cap Telecom Services have actually increased from mid July estimates.