Earnings reports for the fourth quarter of 2013 are set to be released and — once again — profit expectations are so low that companies should be able to trip over them.
Analysts expect earnings reports from companies in the S&P 500 to add up to a 6.3% growth rate for the Q4 earnings calendar, down from a forecast of 9.6% as of Sept. 30, according to data from FactSet. Earnings whisper figures are likely higher, but most market participants are counting on the official Wall Street estimates.
It has been typical for earnings estimates to come down sharply the closer we get to kicking off the earnings calendar for several years now … and it hasn’t hurt the market one bit.
If anything, low expectations only make it easier for companies to “beat the Street” when they release earnings reports, and this quarter’s earnings calendar should be no exception.
Better-than-expected earnings reports should be driven by the top contributors to S&P 500 earnings growth. That puts financials, telecoms and industrials under the microscope — those sectors are supposed to show the greatest year-over-year earnings growth as we work through the Q4 earnings calendar.
Indeed, financials will be critical to the S&P 500’s growth rate. If you exclude earnings reports from financial stocks — projected to show 24.1% growth — earnings from the rest of the index add up to an increase of just 2.9%.
On the other side of the ledger, materials and energy sector earnings are expected to be the most disappointing items on the Q4 calendar. In the materials sector, earnings reports are projected to show us a 4.8% drop in profits. Energy stocks will fare even worse. The sector’s earnings should add up to a drop of 7.8% in Q4 earnings.
And let’s not forget earnings whisper numbers. Companies like Google (GOOG) and Apple (AAPL) are often judged against unofficial earnings whisper numbers — figures that are much higher than official estimates. And even if they beat the Street but miss these earnings whispers, they still can sell off. The FactSet data naturally doesn’t take earnings whisper numbers into account, and that can throw the market a curveball.
Earnings Reports to Show Little Revenue Growth
The fourth-quarter earnings report slate also is expected to again show almost no revenue growth.
Analysts expect S&P 500 companies to reveal a 0.3% rise in sales — essentially flat with the year-ago period. To be fair, most of that weakness will come from the financial sector, and within that sector, most of the revenue declines will show up in just a handful of earnings reports.
However, even the sector with the best revenue growth — information technology — is projected to show a top-line increase of only 3.9% by the time we close the earnings calendar. Earnings reports from the healthcare and consumer discretionary sectors also will show growth in excess of 3%.
Still, if this quarter’s earnings calendar comes in much the same way previous periods have gone, the stock market will be just fine.
After all, even more important to supporting higher stock prices is the expectation that profits will improve in each subsequent quarter for the rest of the year. And indeed, they should.
Analysts project Q1 earnings to grow 4.4%, while the second-quarter earnings calendar should bring about 9.2% growth once all the reports are in. Q3 earnings reports should equate to 12.2% growth. Finally, for the fourth-quarter earnings calendar, analysts expect profit growth of 13.5% from the S&P 500.
Stocks are forward-looking, making accelerating earnings growth supportive of higher share prices. Indeed, if forecasts for future earnings reports are correct, the full year should be good for an earnings growth rate of 10.5% for all of 2014.
It probably goes without saying, but double-digit-percent earnings growth is excellent fodder for the bulls.
For now, corporate Q4 earnings reports — an important leg propping up share prices — look like they won’t derail the bull market. In fact, there’s a very good chance key companies will even beat the higher earnings whisper numbers.
But, of course, it’s all subject to revision if the earnings calendar ends with an unexpected thud.