S&P 500 Earnings Decline Not As Bad As Predicted

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As the last of the S&P 500’s earnings reports trickle in, we now have a much clearer picture of third quarter reporting season. In fact, the overall earnings decline didn’t turn out to be nearly as bad as analysts had been predicting it would be.

S&P 500 earnings fall 1.41%

At the beginning of earnings season, S&P Capital IQ Senior Analyst Lindsey Bell warned that this year’s third quarter would bring the first decline for the S&P 500 since the third quarter of 2009 and projected a 5% decline, which was nearly in line with other firms’ estimates, like FactSet, which predicted a 5.5% decline. Now after 502 companies in the benchmark index have reported, Bell reports that the earnings decline was only 1.41%. The total earnings for the index now stands at $29.63 per share.

Throughout the third quarter reporting period, regular checks of earnings measurements for the S&P 500 indicated steady improvement throughout the season. Here’s a look at how the projections for the third quarter have developed throughout the year:

Energy to blame for Q3 earnings decline

Bell reports that seven of the ten sectors in the S&P 500 Index racked up earnings growth during the quarter, with Consumer Discretionary, Healthcare, and Telecommunications leading the way. Unsurprisingly, Energy is still a heavy weight on the index and mostly to blame for the third quarter decline. Materials is also a meaningful drag, and Consumer Staples to a lesser extent.

Here’s a look at how the S&P 500’s earnings are stacking up by segment:

S&P 500 Earnings

Excluding the drag from the Energy sector, third quarter earnings for the S&P 500 would have increased 6.2%. Here are the current standings for S&P 500 earnings by sector:

S&P 500 Earnings

Earnings beat rate just below average

According to Bell, 325 of the 502 companies that have reported their third quarter earnings so far have beaten consensus estimates, while 106 have missed and 71 companies have reported in-line results. This amounts to a beat rate of 65%, which Bell says is just under the historic average beat rate of 66%. Here’s the mix of earnings and revenue beats by sector:

S&P 500 Earnings

In terms of valuation, the S&P 500 is trading at a forward 12-month PE ratio of 17 times, which is higher than the 15-year average multiple of 16 times.

S&P 500 Earnings

Q4 earnings expected to decline

Looking ahead to the fourth quarter reporting period, analysts are gearing up for another decline. As you can see from this chart, their earnings expectations for the fourth quarter have plunged as the year dragged on:

S&P 500 Earnings

Analysts are expecting the S&P 500 to turn the corner early next year, although their earnings growth estimates for the first and second quarters have declined as this year went on:

S&P 500 Earnings

And here’s a look at how earnings growth estimates for calendar years 2015 and 2016 have developed this year:

S&P 500 Earnings

All charts and graphs in this article are courtesy S&P Capital IQ.

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