As has been the case at the start of recent quarterly earnings cycles, the current +6.3% growth rate for Q4 represents a sharp drop over the last three months, as the chart below shows.
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 Q3 earnings season was no different. Estimates for most sectors came down since the quarter got underway, but the Q4 revisions were particularly pronounced for the Industrials, Finance, Autos and Energy sectors.
The earnings growth expected in Q4 at this stage of the reporting cycle is the highest that we have seen in any of the last few quarters. A big reason for that is easy comparisons, as 2012 Q4 represented the lowest quarterly earnings total for the S&P 500 in the last six quarters, with the comps particularly easy for the Finance sector, helping produce the sector’s impressive +19.4% growth rate.
Within the Finance sector, the comparisons are particularly easy for the insurance industry – the industry alone accounts for more than a quarter of the sector’s total earnings – given the impact on the industry’s profitability from the East Coast storms in late 2012. Total earnings for the insurance industry are expected to be up more than +40% in Q4, with all the major industry players like Chubb (CB) and Travelers (TRV) producing strong growth rates.
While easy comparisons are driving the year over year growth rate in Q4, there hasn’t been much growth lately despite very high level overall total earnings. Total earnings for companies in the S&P 500 reached an all-time record at $262.5 billion, surpassing the previous record reached the quarter before. Current estimates for Q4 work out to a modestly lower total for the quarter. But when all is said and done about Q4, we will likely have seen another quarterly record.
But of more interest than Q4 growth will be management guidance for 2014. Companies typically provide guidance only for the following quarter, but they do tend to discuss their outlook their outlook for the coming year on the Q4 earnings calls. It will be interesting to see if management teams see any material improvement in the earnings picture this year along the lines of current consensus earnings expectations for 2014. Total earnings are expected to be up +10% in 2014, up from +4.6% growth in 2013, with most of the growth coming in the back half of the year.