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CHICAGO, Nov. 1, 2013 /PRNewswire/ -- Director of Research Sheraz Mian says, "Q3 earnings season had a shaky start... but all of that changed over the last two weeks."
· Record Earnings, But Outlook is Uncertain
The Q3 earnings season had a shaky start, with companies struggling to meet lowered expectations and growth rates tracking below recent quarters. But all of that changed over the last two weeks, with Q3 now on track to surpass the performance of the first two quarters of the year. There is still not much growth and most companies are still guiding lower, prompting estimates for Q4 to come down.
But when all is said done about the Q3 earnings season, we will have a new quarterly record for total earnings and the quarter's earnings growth rate will likely be the best thus far this year.
Total earnings for the 355 S&P 500 companies that have reported results already, as of Thursday morning October 31st, are up +4.5% from the same period last year, with 67.3% beating earnings expectations with a median surprise of +2.6%. Total revenues for these companies are up +2.9%, with 49% beating revenue expectations with a median surprise of +0.1%.
The earnings beat ratio looks more normal now than was the case earlier in this reporting cycle. It didn't make much sense for companies to be struggling to beat earnings expectations following the significant estimate cuts in the run up to the reporting season.
The current above average earnings beat ratio for the 355 S&P 500 companies that have reported already confirms what many of us were suspecting all along – that estimates had fallen enough to make it easy for companies to come ahead of them. We see this quarter after quarter, with about two-thirds of the companies beating earnings expectations – a good illustration of management teams' tendency to under-promise and over-deliver.
The composite earnings growth rate for Q3, combining the results from the 355 that have come out with the 145 still to come, currently remains at +4.2% on +2.4% higher revenues. It is perhaps reasonable to expect that the final Q3 earnings growth tally will likely be not much different from the +3.4% achieved in Q2.
· Guidance has been overwhelmingly negative over the last few quarters and is not much different thus far in Q3 either, a few notable exceptions aside. The weak guidance from Starbucks (Nasdaq:SBUX-Free Report) today is just the latest in long line of industry leaders like Dow Chemical (NYSE:DOW-Free Report), Caterpillar (NYSE:CAT-Free Report), IBM (NYSE:IBM-Free Report), and Intel (Nasdaq:INTC-Free Report) that offered less than reassuring outlook.
Given this backdrop, estimates for Q4 will most likely come down quite a bit in the coming weeks. And with the market expecting the Fed to wait till early next year to start Tapering its QE program, investors may shrug this coming period of negative estimate revisions, just like they have been doing for more than a year now.
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