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Earnings: Q3 Could Be Cheerier Story Without Energy’s Stain

October 5, 2015
Earnings: Q3 Could Be Cheerier Story Without Energy’s Stain

Remember Q3? Or have you put it out of your mind? It was a tough stretch for some U.S. companies and investors as China’s troubled economy rocked the markets. China’s impact—coupled with sluggishness in Europe, Japan, and developing markets that hit commodity prices—cut into multinationals’ exports and sales abroad.

As if that wasn’t enough, some U.S. companies—particularly those with operations abroad—were smacked by the impact of a stronger dollar.

We saw the nagging influence of these factors on Q2 earnings, and industry analysts say the same fate likely may await in the Q3 reports that begin to roll out later this week. But that’s no surprise, right?

Alcoa (AA) unofficially kicks off the Q3 reporting period after Thursday’s closing bell. Johnson & Johnson (JNJ), Intel (INTC), Netflix (NFLX), and a number of big financial names release results next week. Then the pace of reports picks up notably from there. You can track an earnings calendar, get a reading on short-term options positioning for anticipated share moves, chart volatility, and more all on the new-look thinkorswim® platform.

Top Line Focus

This time around, per-share results may not matter all that much—there’s plenty of accounting gymnastics to prop those up. We want to know how top lines fared—we want to see how companies beat, met, or missed revenue expectations. Earnings influence stretches beyond pure sales and profit. For instance, many companies stepped up their share buyback programs and cut back on investments and infrastructure.

Look no further than Peoria, Ill.-based Caterpillar’s numbing announcement late last month that it will slash roughly $1.5 billion in costs annually and more than 10,000 jobs as it wrestles with a global slowdown in key markets and industry sectors, most notably mining and energy, the company said. That underscores how Q3 results could be heavily sector-specific, with energy and materials likely getting trounced, while telecom and financials should hold up relatively well, industry analysts say.

In the past couple of quarters, forecasters called for the first year-over-year decline in S&P 500 earnings in five years only for companies to turnaround and beat lowered forecasts and show a net year-over-year rise. Forecasters aren’t deterred. Analysts reporting to Thomson Reuters are warning that Q3 earnings per share will retreat 4.5% on a year-over-year basis at companies in the S&P 500. Strip the estimated 65% drop in energy-sector results and that estimate turns positive to a gain of 3.4%.

For sure, earnings forecasting has been a moving target. Company executives and Wall Street analysts have done their best to handicap the tug of global economic shifts and currencies; they’ve lowered expectations repeatedly, although some analysts note that this season kicks off with fewer earnings warnings than in the past couple of quarters. As the Street braced for bad news, actual earnings results have outperformed Street forecasts by an average of four percentage points over the past 14 quarters.

That Confounding Consumer

We’re also going to be watching what comes out of the consumer staples and consumer discretionary sectors because these categories can help us get a better sense of economic health. Of course, we need all the help we can get as we watch the Federal Reserve struggle with the timing of what would be its first interest rate hike since 2006; the Fed has a meeting in October and December yet this year.

At this point, industry analysts see consumer discretionary earnings rising 11.6%, while consumer staples could decline marginally. If those directions switch, and more consumers start shopping for staples, that’s a potential sign that the U.S. economy is sputtering.

Stay tuned, it’s bound to be a telling quarter, set against a backdrop of already volatile stock trading.

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