US Q3 earnings season under way

Earnings season kicked off this week and is expected to show the slowest growth in earnings since Q2 2016.

This week Q3 2017 earnings season kicked off with several key S&P 500 financial companies reporting (e.g. Blackrock, JPMorgan, Wells Fargo, Bank of America). After Q2 2017 posted the first back to back double digit earnings growth since Q3 2011, earnings growth is expected to slow in Q3 2017. Earnings are expected to grow 3% (YoY) which would be the slowest growth in five quarters. Some of the key factors we will be monitoring include:

  • Is seasonality a factor? Since the Great Recession, Q3 earnings have been seasonally weak. In fact, the third quarter has posted the slowest earnings growth of all the calendar quarters. Since the end of the Great Recession, Q3 earnings have grown, on average, ~5%, almost 300 bps below the historical average of all the other quarters since 2009.

  • Is the bar set too low? While seasonality may be a factor for Q3 earnings, the bar may have been set too low for the quarter. Typically, in the 12 weeks leading up to earnings season, earnings are downgraded. Over the past eight quarters, earnings have been downgraded by ~3%, however in this earnings season, earnings estimates have been downgraded by ~4%.

  • Cyclicals (ex financials) to lead earnings: With seven of the 11 S&P 500 sectors expected to post positive earnings growth, the bulk of the growth is expected to be lead by energy, info tech and real estate which are expected to make up ~30% of the earnings growth. Ex energy, S&P 500 earnings are expected to rise ~2% (YoY). Financials earnings are expected to decline (-9% YoY).   

  • Things to watch in the details: There are several factors to watch in the details in Q3 2017 earnings season, including the low-interest-rate environment and its impact on financials, higher oil prices and the positive impact on energy. In addition, the weak dollar and its impact on multinationals.

 

 

S&P 500 earnings growth 

Source: FactSet, Deutsche Bank AG. Data as of October 10, 2017.

Larry V. Adam
CIO Americas and Global Chief Investment Strategist
Source: CIO Bulletin, October 13, 2017