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SOURCE Zacks Investment Research, Inc.
CHICAGO, Oct. 7, 2013 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Alcoa (NYSE:AA-Free Report), J.P. Morgan (NYSE:JPM-Free Report), Wells Fargo (NYSE:WFC-Free Report), Costco (Nasdaq:COST-Free Report), and Yum Brands (NYSE:YUM-Free Report).
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Shutdown & Q3 Earnings Season
We didn't get the September jobs report thanks to the government shutdown and the impasse promises to steal the limelight from the 2013 Q3 earnings season. With the October 17th debt-ceiling deadline fast approaching, we can only hope that we move past these hurdles without further any major damage.
The Q3 reports have been trickling in, with results from 21 S&P 500 companies out already. All of the reports thus far are from companies with fiscal quarters ending in August, which we count as part of the Q3 reporting cycle. Most of the companies reporting going forward, including Alcoa (NYSE:AA-Free Report) that reports October 8th after the close, are on the calendar quarter. In total, we have 33 companies reporting results this week, including 10 S&P 500 members. J.P. Morgan (NYSE:JPM-Free Report), Wells Fargo (NYSE:WFC-Free Report), Costco (Nasdaq:COST-Free Report), and Yum Brands (NYSE:YUM-Free Report) are some of the notable companies reporting results this week.
J.P. Morgan has been in the news lately for all the wrong reasons, though the company has an impressive track record of positive earnings surprises, having beat expectations in the last 6 quarters. This report could have noisy parts related to the company's recent litigation and regulatory troubles, but core earnings should still remain best in class. The mortgage business will likely be less of a contributor this time around, both for JPM as well Wells Fargo.
Low Expectations for Q3
As has been the case at the start of recent quarterly earnings cycles, expectations for the Q3 earnings season have fallen sharply over the last three months. Total earnings for companies in the S&P 500 are now expected to be up only +1.1% from the same period last year, down from +5.1% at the start of the quarter in early July.
This negative revisions behavior is hardly unusual as we have been repeatedly seeing this pattern play out in recent quarters. Companies have been overwhelmingly guiding lower, prompting analysts to cut estimates for the following quarter. The revisions behavior ahead of the Q2 earnings season was no different.
Most of the same sectors have experienced negative revisions this time around as was the case in Q2. The 'regulars' on the negative estimate revisions front include Technology, Basic Materials, and Industrials. But in addition to those sectors, Retail and Consumer Staples have played some roles in bringing down expectations for Q3 as well.
Estimates for other sectors have come down as well, with even the Finance sector earnings expected to be up +5.9% today, vs. +6.2% last week and +8.1% in early July. Energy, Utilities, Conglomerates and even Construction have suffered negative revisions in varying degrees.
High Expectations for Q4
While estimates for Q3 have come down, the same for Q4 and the following quarters have held up fairly well, as the chart below shows.
Part of the strong Q4 growth is a function of easier comparisons, as 2012 Q4 represents the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector. But it's not all due to easy comparisons, as the expected earnings totals for Q4 represent a new all-time quarterly record. Total earnings for the S&P 500 reached a new record at $258.6 billion in Q2, surpassing Q1's $253.6 billion record. But they are expected to reach $265.7 billion in 2013 Q4, with total earnings growth outside of Finance expected at +5.3%.
The evolving outlook for Q4 is perhaps the most important aspect of the Q3 earnings season, more so than Q3 earnings/revenue growth rates and beat ratios. While the overall level of aggregate earnings is in record territory, there isn't much growth. The longstanding hope in the market has been for earnings growth to eventually ramp up. But the starting point of this expected growth ramp-up keeps getting delayed quarter after quarter. The hope currently is that Q4 will be the starting point of such growth.
Guidance has overwhelmingly been negative over the last few quarters. But if current Q4 expectations have to hold, then we will need to see a change on the guidance front; we need to see more companies either guide higher or reaffirm current consensus expectations.
Anything short of that will result in a replay of the by-now familiar negative estimate revisions trend that we have been seeing in recent quarters. The market didn't care much as estimates came down in the last few quarters, hoping for better times ahead. Will it do the same this time as well, pushing its hopes of earnings ramp up into 2014? We will find out the answer to that question over the next two months.
About the Zacks Rank
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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