While the third quarter earnings reporting season turned out to be far better than expected, although it still marked the first earnings decline since 2009, the tides have turned. Data on Q4 estimates have shown a definite shift toward the negative, suggesting that the fourth quarter will turn out to be worse than initially expected.
4Q earnings estimates dive
The shift began happening in the month of October, and there’s a huge difference between the -0.45% decline that was projected for the S&P 500’s fourth quarter earnings as of Oct. 1 and the -6.11% decline that’s being projected now. As the year has gone on, estimates for fourth quarter earnings have gotten progressively worse, and the same has occurred for the benchmark index’s first quarter estimates, according to data from S&P Capital IQ. Here’s a look at how the estimates have shifted throughout 2015:
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As you can see, at the beginning of the third quarter reporting period, Wall Street was expecting a return to growth for the S&P 500’s earnings in the first quarter of 2016.
A closer look at the great earnings shift
The huge dive in earnings estimates for the fourth quarter didn’t come overnight. Wall Street has been chipping away gradually. Today’s estimate for a 6.11% decline follows Tuesday’s estimated 6.05% decline, and we’ve seen almost a steady decline over the last couple of weeks. Here’s a look at the day-by-day development of earnings decline estimates for the S&P 500, as tracked by S&P Capital IQ Senior Analyst Lindsey Bell:
- Today: -6.11%
- Yesterday: -6.05%
- Monday: -6.07%
- 22: -5.81%
- 21: -5.89%
- 20: -6.01
- 19: -5.99%
- 15: -5.93%
- 14: -6.15%
- 13: -6.07%
- 12: -5.88%
- 11: -5.72%
- 7: -5.53%
So why might we be seeing this shift? Certainly macroeconomic issues are partly to blame. Currency issues alone weighed on Apple’s results by 800 basis points, and one firm estimates that the iPhone maker’s sales would have topped $80 billion for the fourth quarter if it didn’t have to deal with currency headwinds.
And the longer these problems last, the more likely we will start to see currency hedging roll off at many companies. In fact, the world’s markets are looking so bad that some say a global recession is looking more and more likely.
Bell also highlighted factors pertaining to the way the reporting season is falling on the calendar. She told ValueWalk:
“One thing to note is that even as we are in the peak week, we still have most of the companies scheduled to report this week to come (between tonight and Friday), i.e. 88 of the 134 have yet to report this week. Further, we typically have swifter moves in earnings as reports are highly concentrated in week 2-4 (~75% of the index) during earnings season for Q3, Q2, and Q1. The Q4 reporting period is a little more spread out given SEC reporting requirements for the year end and only ~68% reporting over weeks 2-4 this Q.”
S&P 500 earnings estimates fall 22 basis points in a week
Bell reports that the current estimate for the S&P 500’s earnings is $28.68, which represents a 22 basis point decline since last Wednesday. Most of the sectors in the index are expected to post earnings declines for the fourth quarter in a virtual bloodbath with few companies being likely to please investors with their results.
Estimated sector decline percentages falling too
Similar to the shift we’ve been seeing in the overall decline estimate for the S&P 500, individual sectors are seeing the size of their estimated declines come down. Bell told ValueWalk:
“It is disappointing that the Q4 EPS growth rate hasn’t started to move upward, it usually beings improving as we get through peak earnings, which is this week. Estimates for Energy keep coming down as we have yet to enter peak earnings season for that sector (only 10% of these companies have reported vs 22.6% of the S&P 500). Energy growth is now -74% vs -67.9% on January 1. Financials is the other sector that has endured a significant reduction in growth since Jan. 1 (now -2% vs +1.4% previously) and that is largely related to AIG’s $3.6b reserve charge announced yesterday. The majority of the banks that reported beat the consensus estimate. On the upside, tech has had the largest upward move (though is still negative) to -3.3% from -4.5% previously.”
Excluding the drag from the Energy sector, the S&P 500’s earnings would be estimated to decline only 0.3% for the fourth quarter. Here’s a look at the current standings for earnings in each of the sectors:
Earnings beat rate above average… for now
Bell also reports that the current beat rate for companies in the S&P 500 is 68%, which is slightly ahead of the 66% historic average. Thus far 114 companies have reported, and 77 have beat estimates, while 16 posted in-line results and 21 missed.
Return to growth for Q2?
For now anyway, Wall Street is expecting a return to growth for the second quarter, but as you can see, growth expectations have been declining steadily as well. It will be interesting to see if by the end of the fourth quarter reporting season, analysts begin to see another quarter of earnings declines. We saw this happen during the third quarter reporting season as Wall Street was previously expecting a return to growth in the first quarter.
All charts in this article are courtesy S&P Capital IQ.