Earnings Trends: Consumer Discretionary Leads The Pack In Growth

by: Zacks Investment Research

We are looking forward to yet another quarter of solid earnings growth among the S&P 500 firms. While the current expectations for median year-over-year growth fall short of double digits, at 9.0%, it is not that far away.

Early indications of actual third-quarter earnings, 29 firms (5.8% of S&P 500) with quarters ending in August, have been reported. The most notable of these were the Investment Bankers, where three disappointed and one had a positive surprise. However, one of those three, on closer inspection is just about inline.

Other sectors have had a smattering of reports as well, and thus far, out of the 29 S&P 500 firms that have reported, positive surprises lead disappointments by 16 to 10, or a surprise ratio of 1.60. While this is lower than we have seen in the past, it is still above 1.0. The median surprise is a healthy 2.70%. However, thus far the median year-over-year growth rate is an anemic 5.2%, well below the double-digit growth that we have consistently seen over the past five years.

So far, based on a very small and un-representative sample, Consumer Discretionary appears to be the winner. It has a median year-over-year growth rate of 9.2% and has seen six positive surprises and four disappointments. Consumer Staples is falling just short of Consumer Discretionary at 8.3%, but has the highest median surprise at 4.7% with positive surprises leading disappointments by 3:1.

The other three sectors which have had firms report are showing anemic or worse year-over-year growth. Tech however is doing okay on the surprise front with four positive and only one negative for a median surprise of 2.70%.

It is still very early days in the reporting season. The standings among the sectors should change significantly as more results come in. Based on the expectations for the firms yet to report, Health Care and Industrials should see a repeat of their strong performances in the first two quarters of the year, with growth of 13.6% and 13.1%, respectively.

Consumer Discretionary should slip down the leader board, with only 7.3% growth expected. Utilities, Financials and Energy are expected to bring up the rear of the earnings parade. The median year-over-year growth rate for the overall S&P 500 should rise as more firms report. The median expected growth rate for those yet to report is 8.7%. While that if achieved, would be the weakest growth in over five years, it is above the current showing.

Given the fears out in the market, even that would not exactly be the end of the world. With a normal ratio of positive surprises to disappointments, it is within range of yet another quarter of double-digit year-over-year growth. If so, it would mark the 21st straight quarter of double-digit median growth. However, so far we have not been seeing the normal 3:1 ratio of positive to negative surprises, the ratio is currently about half that level.

We would note that while U.S. economic growth may slow sharply in the third quarter due to housing and mortgage problems, worldwide economic growth remains exceptionally strong. Most S&P 500 firms have substantial overseas activities that benefit from that strong growth. In addition, the dollar is much weaker than it was a year ago and many firms will benefit from currency translation. A weak dollar also tends to lead to higher commodity prices (since commodities are denominated in dollars) which will help the earnings of commodity oriented firms. To overseas investors, the growth will not look quite as impressive, but for dollar based investors, a weak dollar helps earnings growth. Share repurchase should also continue to support EPS growth in the third quarter.

Written by Dirk Van Dijk.