Seeking Alpha

S&P 500 Earnings Update: Q4 To Turn Negative

|
About: S&P 500 Index (SP500), Includes: BAPR, BAUG, BJUL, BJUN, BOCT, DMRL, EPS, IVV, PAPR, PAUG, PJAN, PJUN, PPLC, RSP, RVRS, RWL, RYARX, SDS, SFLA, SH, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SSO, SSPY, UAUG, UJAN, UOCT, UPRO, USMC, VFINX, VOO
by: Eric Basmajian
Eric Basmajian
Specializing in economics, macro, portfolio strategy, bonds
Summary

S&P 500 estimated earnings growth continues to trend lower into 2020.

The broad equity market remains comfortable with declining earnings expectations.

Watch out for Q4 EPS growth slipping below Q3 EPS growth. Currently the market is expecting accelerating earnings growth for the next five quarters.

S&P 500 Earnings Update: Q4 To Turn Negative

With 90% of S&P 500 companies reporting Q3 earnings results, the final numbers are nearly in. Aggregate earnings growth for Q3 is down roughly 1% from a year ago.

Negative earnings growth has been reported in the energy, materials, consumer discretionary, and information technology sectors.

Industrials, consumer staples, health care, financials, communication services, utilities, and real estate posted positive earnings growth.

S&P 500 Q3 Earnings Scorecard:

Source: Bloomberg, EPB Macro Research

Earnings estimates for the remainder of 2019 and into 2020 continue to decline.

Estimates for EPS growth in the present quarter increased from -1.85% to -1.38% as estimates converge to the final numbers in the table above.

EPS growth in Q4 was revised to 0.13% from 0.24%, while estimates in Q1 2020 and Q2 2020 improved week over week.

FactSet, which uses a different methodology than Bloomberg, is reporting an estimated decline in EPS for next quarter, -0.4% year over year.

Given the trend and the most recent economic data, Bloomberg estimates are likely to show a negative EPS growth in Q4.

Bloomberg S&P 500 Quarterly EPS Growth Estimates:

Source: Bloomberg, EPB Macro Research

The decline in the forward estimates is notable, but the sequential improvement that remains in the forecast is the more critical factor. While numbers are coming down, the market is estimating EPS growth to have at least three sequential improvements over the next several quarters.

Markets love this rate of change acceleration, which is why the continued decline in Q4 numbers is critical to watch.

Q3 will close out with EPS growth of roughly -1% and the market is expecting sequential improvement from here, even if the numbers are negative, a pass will be granted for "less negative." The risk is a sequential decline in EPS growth develops as Q4 estimates slip into negative territory. This scenario would remove the "earnings trough" underpinning that has the equity market rightfully optimistic.

As we move deeper into 2020 and beyond, estimates for EPS growth leap higher, something that is not currently reflected in any leading or coincident economic data points.

Earnings growth for the full year 2019 is now expected to be about 1.76% higher than a year ago. The deceleration in earnings growth from 2018 to 2019 closely ties to the slowdown in GDP growth from the peak in Q2 2018 through the present day.

Estimates jump in the back half of 2020, dragging the full year 2020 figures up to +9.19% growth. Earnings growth is expected to post an additional 10.44% growth in 2021.

Bloomberg S&P 500 Full-Year EPS Growth Estimates:

Source: Bloomberg, EPB Macro Research

The average of full-year 2019 and 2020 EPS declined week over week from $170.15 to $169.91.

S&P 500 2019 + 2020 Earnings Estimate:

Source: Bloomberg, EPB Macro Research

Despite the continued downgrades to short-term earnings estimates, equity prices continue to trend higher, fueled by unrelenting trade optimism.

The re-emergence of the "reflation trade" has pushed many of the EPB cyclical to defensive ratio baskets higher week over week as bank stocks continued to rally on the sharp rise in interest rates.

EPB Macro Research Cyclical to Defensive Ratio:

Source: Bloomberg, EPB Macro Research

As trade optimism lifts global growth expectations, exchange-traded commodities have increased. This increase in commodity indexes, such as the Bloomberg Industrial Metals index, is not being supported by the CRB index of raw industrial commodities that do not trade on exchanges with futures contracts.

Interest rates are heading higher because inflation expectations, volatile in the short-term, have spiked to meet the rally in exchange-based commodities.

Inflation Expectations & Commodities:

Source: Bloomberg

If the rally in commodities is based on growth expectations that fall short, we are likely to see inflation expectations trend back towards the more reliable non-exchange-traded commodity basket over time. Should the rise in inflation expectations get confirmed by a material increase in growth, the CRB index will rise to meet the pickup in demand.

Fundamentals change direction less often than market prices.

It remains unclear if the economy can accelerate to a sufficient magnitude to deliver on back to back 10% earnings growth, with or without tariffs.

Thanks for reading! If you liked this article, please scroll up and click "Follow" next to my name to receive our future updates.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.