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

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