5 Takeaways from Q3 Earnings Season

By: Wayne Duggan

Earnings season hasn’t quite gone the way investors had hoped, with the S&P 500 dropping about 8% since October 1. With nearly 100% of S&P 500 companies having reported their Q3 earnings, here’s a look at five trends that have emerged from the quarter, according to data compiled by FactSet.

1. The Market Is Not Rewarding Earnings Beats

Companies that have reported earnings for the quarter have seen an average gain of 0.3% from the two days prior to report to two days following. That gain is well below the five-year average in that span of 1.0%. At the same time, companies that have reported below expectations have averaged a 3.0% decline, slightly worse than the five-year average of a 2.5% drop.

This trend is as pure a representation of the fear in the market as you can get. Traders are far more likely to punish stocks for missing expectations than they are to reward stocks for beating.

2. This Quarter Had the Highest Earnings Growth in Eight Years

Looking over a longer horizon, however, this was objectively a good earnings season. So far, Q3 earnings among S&P 500 companies are up more than 25.7%, the market’s highest year-over-year earnings growth rate since Q3 of 2010.

However, you certainly wouldn’t know it by looking at the S&P 500’s reaction. Q3 is on track to be the S&P 500’s third straight quarter of at least 20% earnings growth. But incredibly, the S&P 500 is flat in 2018 (as of this writing).

3. Energy/Financials/Communication Services Crushed It

The Energy sector reported the highest earnings growth of any market sector in Q3, up 126.9% from a year ago. All five financial sector industries also reported at least 20% earnings growth in the quarter, led by 138% earnings growth in the insurance industry. Finally, all four Communication Services industries reported at least 25% earnings growth, led by 36% earnings growth in the Diversified Telecommunications Services industry.

4. Guidance Is A Problem

The first three takeaways make it seem as if the negative market reaction to earnings season is completely misguided. However, things are a little less rosy on a forward-looking basis. Of the companies that have issued guidance for the December quarter, about 69% have provided a number lower than consensus estimates. But while that number seems troubling, FactSet reports that it is roughly in-line with the five-year average of 70% of companies issuing negative guidance.

5. The Big Winners and Losers

Here are the S&P 500 components that have reported the three largest Q3 earnings beats thus far:

News Corp ($NWSA) reported earnings 260.9% above analyst estimates
Under Armour ($UA) reported earnings 103.6% above analyst estimates
Charter Communications ($CHTR) reported earnings 100.1% above analyst estimates

And here are the three largest earnings misses up to this point:

American International Group ($AIG) reported earnings 678.8% below analyst estimates
National Oilwell Varco ($NOV) reported earnings 100.0% below analyst estimates
DaVita ($DVA) reported earnings 36.3% below analyst estimates

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Disclosure: the author holds no positions in the stocks mentioned.

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