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S&P 500 earnings growth estimate improves, but outlook slows further
By: MarketWatch | January 18, 2019

Earnings growth estimates have improved slightly for the fourth quarter but have declined for the current quarter

The fourth-quarter earnings growth for S&P 500 companies has improved slightly in the last week, but was still expected to slow to less than half the average of the first three quarters of the year, and the outlook for the current quarter has declined.

FactSet publishes a “blended growth” percentage change for earnings per share for the S&P 500, representing a blend of year-over-year growth of actual results already reported and the average estimates of surveyed analysts of upcoming results.

With about 11% of the S&P 500 companies reporting results through Friday, the overall blended EPS growth consensus for the S&P 500 inched up to 10.8% from 10.6% a week ago. That includes an estimated 6.8% boost to earnings from the recent corporate tax cut, according to Credit Suisse analyst Jonathan Golub.

The current growth estimate compares with the average reported growth of 25.5% for the first three quarters of the year, and would represent the lowest expected growth since 7.3% in the third quarter of 2017. And for the first time since Q3 2017, the growth isn’t expected to be unanimous: The utilities sector is the only one of 11 S&P 500 sectors expected to report an earnings decline.

The expected growth is also down from the 16.31% that was expected at the end of the third quarter, as concerns over the negative effects of a strengthening U.S. dollar, rising input costs and worries over a trade the trade war with China have pulled down analyst projections.

“Those worries, especially trade concerns, are likely to produce an earnings season that is softer than the norm for this bull market, according to our analysis; while most companies are likely going to beat their estimates, a below-normal amount of them are likely to do so,” wrote Brian Reynolds, analyst at Canaccord Genuity.

The S&P 500 index SPX, +1.12% tumbled 14% during the fourth quarter, compared with a total 9% gain for the first three quarters of the year. It has advanced 2.6% since earnings season kicked off on Monday.

While the bulk of companies are still likely to beat earnings expectations, as usual, Reynolds said his analysis of corporate tax payments in December suggests a “below-normal” number of companies are likely to do so.

Over the past five years, John Butters, senior earnings analyst at FactSet, said 71% of S&P 500 companies beat EPS expectations.

What might be of more concern to investors that what happened last quarter, is that the EPS blended growth estimate for the first quarter has dropped to 1.3% through Friday, from 1.9% a week ago and from 6.7% on Sept. 30. The first quarter is shaping up to witness the slowest growth since it rose just 0.3% in the second quarter of 2016 to snap a five-quarter streak of declines.

The following table shows what analysts expected through Friday in terms of year-over-year EPS growth for the S&P 500 and each of the S&P 500’s 11 sectors for the fourth and first quarters, as well as the change in estimates since Jan. 11 and Sept. 30.

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