Third Quarter Earnings Update

Third quarter earnings season is almost in the books. With 90% of S&P 500 companies reporting, FactSet Research estimates the index eps will print a year-over-year earnings decline of 2.4% – its third consecutive contraction. Looking ahead, the fourth quarter is unlikely to be much better, with growth indicated to be below zero once again.

The earnings picture stands in stark contrast to healthy stock market returns this year, returns led by Information Technology. Surprisingly, Tech has been one of the largest drags on the earnings front, outperforming only Energy and Materials stocks in that regard. One reason is Tech’s heavy exposure to the rest of the globe, where economic activity has weakened relative to our own economy. Companies with a domestic tilt have clearly done a better job maintaining earnings in Q3.

EPS Domestic vs International.PNG

Still, a market near all-time highs indicates optimism about the future. The average estimate for bottom-line growth in 2020 is almost 10%, and each quarter of next year is expected to grow more quickly than the one prior. Of course, analyst estimates have a tendency to be revised lower over time. Excluding the tax-cut-fueled boost to eps in 2018, earnings growth has disappointed initial estimates in every year since 2011.

EPS Growth Squiggles

When it comes to 2020 though, we have reason to be even more skeptical than usual about analyst estimates. Companies, especially those with a global industrial presence, are plagued by an uncertain economic and geopolitical environment. They’ve called out global weakness and have been hesitant to give 2020 forecasts themselves.

WW Grainger Inc: “While the global demand environment continued to weaken, our U.S. and endless assortment businesses gained share…” said DG Macpherson, Chairman and Chief Executive Officer.

Cummins, Inc: “While we expected to see a moderation of demand in the second half of the year, sales have weakened even faster than we anticipated,” said Chairman and CEO Tom Linebarger.

A. O. Smith Coporation: “We face headwinds in our markets in China, and we anticipate that those headwinds and elevated channel inventory levels will remain through the fourth quarter,” Kevin Wheeler, president and chief executive officer.

Parker Hannifin Corporation: “We have revised guidance based on the impact of the closing of the LORD Corporation and Exotic Metals Forming acquisitions and softening macroeconomic trends,” Chairman and Chief Executive Officer, Tom Williams.

BorgWarner: “Global light vehicle production expectations remain volatile, particularly
in China.”

Caterpillar: “In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” Jim Umpleby Chairman and CEO.

Meanwhile, the U.S. consumer has been the most resilient part of the economy over the past year. Bricks and mortar retailers make up the bulk of earnings releases over the next two weeks, as Walmart, Home Depot, Target, Lowe’s, Macy’s, and Kohl’s, among others, are all set to report. They’ll give us key insights into whether the environment has changed.

Assuming it hasn’t, Jamie Dimon, chairman and CEO of JPMorgan Chase, said it best:

“The consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels. This is being offset by weakening business sentiment and capital expenditures mostly driven by increasingly complex geopolitical risks, including tensions in global trade.”






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