Q3 EPS Expectations Just Turned Negative: Six Consecutive Quarters Of Declining Earnings

Tyler Durden's picture

With 25% of companies reporting Q2 earnings to date, 68% have reported deeply adjusted, non-GAAP earnings above consensus while 57% have reported sales above the mean estimate. Keep in mind that coming into the earnings session, most sellside research had deeply slashed their EPS expectations, especially as we got closer. However even with the modest pick up in earnings if only relative to expectations, the blended earnings decline is still -3.7%, putting the quarter on pace for the fifth consecutive decline in earnings since Q3 2008 through Q3 2009.

More interesting is what happens to the upcoming quarters, because recall that to justify the forward S&P multiple, earnings are expected to soar in the second half of the year. And yet something unexpected is taking place here: instead of rising, Q3 earnings have been declining. Just last leek we noted that according to consensus S&P500 expectations, EPS had dipped from a 0.7% rebound Y/Y to just 0.4% in the span of one week.

And, according to the latest weekly update from Factset, as of this moment consensus estimates now expect the third quarter to be the sixth consecutive quarter of declining earnings, with Q3 EPS forecasts just turning negative for the first time, down from +0.4% to -0.1%.

Indicatively, at the start of the second quarter, consensus expected Q3 earnings to rebound more than 3% Y/Y. They are now negative, primarily on the back of the failure of energy earnings to rebound as the recovery in crude oil prices has not only stalled out but is once again declining, in line with what happened one year ago.

Here is the detail from Factset:

Year-Over-Year Earnings Decline (-0.1%) Now Projected for S&P 500 for Q3 2016


As of today, the blended earnings decline for the second quarter for the S&P 500 stands at -3.7%. Factoring in the average improvement in earnings growth during a typical earnings season due to upside earnings surprises, it still appears likely the S&P 500 will report a year-over-year decline in earnings for the second quarter. If the index does report a year-over-year decline in earnings for the second quarter, it will mark the first time the index has reported five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.


Looking at the current quarter (Q3 2016), what are analyst expectations for year-over-year earnings? Do analysts believe earnings will decline in the third quarter of 2016 also?


The answer is yes. This past week marked a change in the aggregate expectations of analysts from slight growth in year-over-year earnings (0.3%) for Q3 2016 to a slight decline in year-over-year earnings for Q3 2016 (-0.1%).


However, expectations for earnings growth for Q3 2016 have been falling not just over the past few weeks, but over the past few months as well. On March 31, the estimated earnings growth rate for Q3 2016 was 3.3%. By June 30, the estimated growth rate had declined to 0.6%. Today, it stands at -0.1%.


Eight sectors have lower expected earnings growth rates today compared to March 31 (due to downward revisions to earnings estimates), led by the Industrials sector. On March 31, the estimated  earnings growth rate for the Industrials sector for Q3 2016 was 4.3%. Today, the estimated earnings decline is -5.2%.


However, it is interesting to note that analysts in aggregate do expect earnings growth to return in the fourth quarter of 2016. Analysts currently project revenue growth to return in Q3 2016 and earnings growth to return in Q4 2016.

To be sure, just one quarter ago, analysts"projected" Q3 earnings growth would return this quarter. It now appears that won't happen. We look forward to updating this analysis some time in October when "analysts" are forced to shelve their optimistic expectations for a Q4 rebound, as EPS for the entire year go negative once more. At this point in time, 19 companies in the index have issued EPS guidance for Q3 2016. Of these 19 companies, 14 have issued negative EPS guidance and 5 have issued positive EPS guidance.

As of this moment, for all of 2016, analysts are still projecting earnings (+0.3%) and revenues (+1.7%) to increase slightly year-over-year. We would take the under.

For those who still foolishly trade off fundamentals and forward earnings, don't worry - there is always the massive 2017 hockeystick.


And just how are companies expected to attain this lofty surge in earnings? Why on a surge in profit margins over the next few quarters to new all time highs, as companies supposedly slash pay and fire millions...

... even as the Bureau of Labor Services dutifully follows the instructions from the administration and "reports" of continued major job gains and rising wages. Because only under the most ludicrous propaganda narrative, can a late-cycle economy, one which is already the 4th longest "recovery" in history, continue to see rising wages and continued job gains while corporate profit margins soar to record highs despite 3 consecutive years of declining revenues.

Finally, for all those asking how the S&P500 can be trading at all time highs despite what now appears to be 6 consecutive quarters of earnings decline, we wish we had an answer.

Source: Factset

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InsaneBane's picture

The fire rises..

America your money and infrastructure have been important...but now I need to break you slowly.

quant77's picture

the tylers should look at google and tesla stock afterhours its fun friday

philipat's picture

All this would be unnecessary if we would look just at revenues and earnings as reported, or GAAP earnings. The GAAP earnings strip away all the BS and stand at present at 26X P/E on a rolling 2Q MAT basis. GAAP EPS are still subject to distortions from buybacks but that is nothing in comaprison to all the "adjustments for one time non-recurring items", which seem to recur every quarter?

ZH should point out this blatant criminality in every post which does not use GAAP data (gladly provided by the WS sell side) but since it doesn't I will do so.

venturen's picture

should be good for 100 on the dow

brada1013567's picture

The answer is your friendly Central Banker conjuring up fiat from thin air. After all CBs are magic people.

gregga777's picture

Please make it clear in this and future articles and charts that these revenues and earnings are all fraudulent United States Swindlers Excuse Commission-approved non-GAAP figures. This is yet another example of Con Street's sell-side frauds perpetrated on the suckers, I mean, the investing public. GAAP revenues and earnings are vastly worse than presented in this article and articles like it published by a Con Street's fraud merchants.

noideaxxx's picture

well put gregga, we to easily forget all these earnings are mostly non gaap. Apple always report gaap and they will wake up many people.

Muppet's picture

Bullish!             (Well... in truth, its actually a similar word: bullsh.t)

quant77's picture

I have been trying to post screenshots of google, tesla and apple stock if the tylers look at google apple and tesla stock afterhours they would see that google and tesla did very strange things afterhours friday and thursday google and apple did strange things wtf is going on.

wmbz's picture


This is very,very bullish!

Tall Serbian Guy's picture

Bring out your dead...

Strelnikov's picture

Standby for another all time high.

geno-econ's picture

The WIZARD OF OZ resides between GAAP and NON GAAP earnings.  

hooligan2009's picture

this needs to be made relavnt and each boker and bank analysts forecasting EPS for the market starting 18 months ago, on a quarterly basis compared with the buy/sell/hold recommendations of the firm, the salary and bonus of each analyst and the volumes of trades won from these recommendations.

same goes for fund managers that allocated money to the market based on their forecasts.

this thing needs to be blown wide open so that the public can see how much they have made or lost had the analysts forecasts come close ot the outturns.

Consuelo's picture



"Finally, for all those asking how the S&P500 can be trading at all time highs despite what now appears to be 6 consecutive quarters of earnings decline, we wish we had an answer."

Cue up that graph from an article posted earlier today, of the monetary base/S&P overlay...

Consuelo's picture



 Count 'em - 20+ 10 yard cement trucks lined up (on Saturday...) at some building project I just drove by on Central Expressway in Sunnyvale, CA.   The building going out out here in this general area...?   Think 2005/2006 x 2, or more...   

Infield_Fly's picture
Infield_Fly (not verified) Jul 23, 2016 5:46 PM

Yes, but the BOE, SNB, Fed, PBOC, ECB, BOJ keep fattening up their balance sheets.



IronPyrite's picture

The Central Banks Plunge Protection Teams with HFT front running Algo driven Short Squeeze should be good for another 100 points on the S&P 500

tarsubil's picture

Oh, come on! Do earnings really matter that much in business? I don't think so. It's all marketing and ball bearings these days.

GUS100CORRINA's picture



Ajax_USB_Port_Repair_Service_'s picture

Can they can keep this fantasy going until after the election?

Market crashes after Hillary win - Crash due to outside intervention from Russia. We must go to war!

Market crash after Trump win - Crash due to Trump's economic policies. We must impeach Trump!