The US Q3 reporting season has been better than expected. This is one of the key reasons US equities have made fresh all-time highs.
Equity markets “climb the wall of worry” and there were consensus concerns about what would be delivered in this US reporting season. Those concerns proved too bearish.
With nearly 70% of the S&P 500 having now reported to investors, it’s worth taking a step back to place the picture that has emerged into context. While there is a general trend of slowing economic activity, with the uncertain policy and trade environment cited as the main contributing factor by many businesses, US companies are navigating the landscape reasonably well, although there are substantial variations between sectors.
I thought today you might like to read a high level summary of the US Q3 reporting season from analysts at Morgan Stanley in New York. It gives you a clear picture of where sales and profit growth surprised, and where it didn’t. It breaks the results down by sector, regional sales and market cap.
It is good guide to where there is structural growth (non-cyclical) in US equities and where cyclical headwinds persist. It reminds you that it is a “market of stocks”, not a “stock market”, albeit this better-than-feared US Q3 earnings season did drive “Mr Market” to fresh all-time highs.
Next week I’ll give you another stock specific example of a US company showing all the attributes of a structural growth stock.
With the bulk of 3Q reporting behind us, this week will begin the winding down of this earnings season with less than 10% of the S&P 500’s market cap scheduled to report. Notably this week, 20% of Utilities and 13% of Communication Services will report quarterly figures. Major prints to look for throughout the week include: Walt Disney (DIS), CVS Health (CVS), Humana (HUM), and Qualcomm (QCOM).
Earnings scorecard
With over 70% of the S&P 500 having now reported 3Q numbers, companies are continuing to beat earnings expectations at a rate (75%) greater than the historical average (68%). Across the S&P 500, the average company has beaten earnings expectations by a margin of 4.5% and sales forecasts by a margin of 1.4%.
Year-on-year growth
As we head into the final weeks of reporting, the actual Y/Y EPS growth rate (based on companies that have reported) for the S&P 500 is tracking -2.42%. Blended EPS growth (results + estimates for unreported companies) for the S&P 500 is tracking at -2.64%. Energy and Materials are continuing to provide considerable drags to overall earnings growth (-35.9% and -21.1%, respectively), while Utilities and Health Care are reporting the best rates of earnings growth.
More notable is that with well over half the Tech sector having reported by now, the sector’s actual quarterly earnings growth rate is tracking -5.9%, a notable drag on the overall Index, given the sector’s >20% weighting.
Size
Actual earnings from the largest 100 companies in the S&P 500 have come in ahead of forecasts by a margin of 4.6% while the rest of the S&P 500’s members are beating consensus earnings estimates by a margin of 4.3%. Regarding the margin of beats on sales, size continues to be an important input as the largest companies are beating sales forecasts by a margin of 1.9%, while the remaining S&P 500 constituents are beating consensus sales estimates by only 0.6%. Regarding ex-post performance, the S&P 100’s constituents have outperformed the rest of the S&P 500.
Source: FactSet
Foreign sales
The margin of earnings beats between companies with more foreign sales (>25%) and those companies with less (< 25%) has widened over the course of this earning season, as those with more foreign sales are beating earnings forecasts by a margin of 5.3% versus more domestically-focused companies beating estimates by 3.4%. Regarding sales, the results from companies with a larger dependence on domestic end markets have exceeded consensus forecasts by a margin of 0.7% while those with more international sales exposure have beaten consensus estimates by 1.9%. On earnings day, domestically-oriented companies have traded higher relative to SPX by +34bps while the companies with more international exposure have relatively outperformed SPX, trading higher by +87bps.
Source: FactSet
Performance
Companies that have beat on both earnings and sales have relatively outperformed SPX on earnings day by +2.1%, above the average of 1.4% since 2010. Meanwhile, the companies that have missed on both earnings and sales have relatively underperformed SPX on earnings day by a margin on -3.6%. Across the S&P 500, Communication Services and Real Estate have shown the worst 1-day relative performance post earnings, down -71bps and -51bps post-print, respectively.
Source: Morgan Stanley Custom Baskets
Source: Morgan Stanley Custom Baskets
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.
