Earnings Roundup: What’s Driving The S&P 500’s Earnings Growth Rates

Earnings growth estimates for the S&P 500 for Q3 have fallen since the beginning of the quarter. Estimates for both the financials and energy sectors declined significantly. Health care is the only sector whose growth estimates improved since the beginning of Q3.

The S&P 500’s earnings growth estimates for Q3 2014 have declined to 6.4%, from 11.0% on July 1, 2014. The change is not substantially different from the long-term average (since Q2 2002) decrease of 4.0 percentage points from the start of the quarter to the beginning of the reporting season. As noted in a prior research report, “How Good is Guidance?” analysts’ earnings estimates typically become more pessimistic as the quarter approaches.

EXHIBIT 1. S&P 500: Q3 2014 EARNINGS GROWTH ESTIMATES – BEGINNING OF QUARTER AND CURRENT

Source: I/B/E/S data

The financials sector’s earnings growth estimates for Q3 2014 have been cut nearly in half, to 10.4% from 20.6% on July 1, 2014, which is the largest decrease of any sector. Downward revisions to Bank of America Corp.’s (BAC.N) earnings estimates are the primary driver behind this decrease, as expectations dropped to -$0.09 per share from $0.32 per share on July 1 due to litigation charges. If the old estimates of $0.32 per share are used in today’s growth calculation, the financials sector’s Q3 2014 estimated growth rate would increase to 20.3%, and the S&P 500 would increase to 8.1%.

Litigation charges in the third quarter of last year provide an easy comparison for JPMorgan Chase &Co. (JPM.N), which is expected to see earnings of $1.38 per share compared to Q3 2013’s loss of $0.17 per share. This provides a substantial boost to both the financials sector and S&P 500’s Q3 2014 growth rates. If JPM is excluded from the growth calculations, the financials sector’s expected earnings growth rate decreases to -2.9%, and the S&P 500 declines to 4.1%.

A 7.8 percentage point decrease in Q3 2014 earnings growth estimates moved the current estimate for the energy sector down to 6.0%. The oil & gas refining & marketing sub-industry saw the largest decrease in Q3 2014 expected earnings growth, dropping 60.6 percentage points to 143.3%; however, the integrated oil & gas sub-industry’s 5.2 percentage decline to an estimated 0.8% growth over the third quarter of 2013 is the primary driver of the energy sector’s decrease. If the integrated oil & gas sub-industry were removed from the growth calculations, the energy sector’s Q3 2014 earnings growth rate would increase to 11.41%.

Microsoft Corp. (MSFT.N) is expected to see earnings growth decline 21% compared to the prior year’s third quarter. Downward revisions largely related to analysts’ outlook on Nokia lowered earnings estimates to $0.49 per share from $0.64 per share on July 1, 2014. As a result, the estimated Q3 2014 earnings growth rate for the information technology sector fell to 6.4% from 10.3% at the start of the quarter. Excluding Microsoft would increase the sector’s earnings growth rate for the quarter to 9.9%.

The health care sector is the only sector to experience an improvement in estimated Q3 2014 earnings growth since the start of the quarter, increasing 0.9 percentage points to 11.4%. This increase is largely attributable to analysts’ upward revisions to Gilead Sciences Inc.’s (GILD.O) earnings estimates. Gilead is expected to grow 269.2% year over year, and earnings estimates for the quarter have increased to $1.92 per share, from $1.50 per share on July 1, 2014. If Gilead is excluded, estimated Q3 2014 earnings growth for the health care sector decreases to 4.6% and the S&P 500’s growth rate declines to 5.6%.

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