Q3 Earnings Update
This week is when earnings season starts to pick up as Netflix – NFLX headlines the reports. Up until this week, 28 companies in the S&P 500 have reported earnings. Considering the fact that earnings growth is only expected to be 2.1% according to FactSet’s numbers, looking at explanations for why the quarter was so bad makes sense. The chart below shows the reasons companies gave for why their earnings weren’t as strong as they could have been. The number one excuse companies gave was the hurricanes which supports the bullish narrative since they are one time events. PepsiCo said “We estimate the impact of the recent natural disasters to negatively impact EPS by approximately 3 percentage points, and we expect sequential improvement at our North American Beverage business.” Obviously, all companies will have different effects, but this report gives you the idea that earnings growth would have been in the mid single digits if it wasn’t for the storms.
The currency excuse is also temporary because the dollar index has fallen over the past 10 months. In the next two quarters, the index will be lapping the strong dollar which means there should be a positive tailwind. A few companies mentioned how FX issues could diminish or reverse to a positive in the future.
The chart below reviews the current 12 month PE ratios as compared to the 20 year average. As we’ve previously discussed, technology is one of the cheapest sectors. Tech, healthcare, and telecom services all have PEs below their 20 year average. Energy is the most overvalued sector. This is only the first step to analyzing stocks. You need to determine which sectors have the best earnings prospects. Even though financials have higher than average PEs, it could make sense to buy them in a rising rate environment. Their earnings are being suppressed by the hurricanes the most as insurance companies are taking one time losses. The financial sector is expected to see earnings fall 11.4% year over year which makes it the worst performing sector in Q3 if results meet expectations.
