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Strong end of third quarter earnings season

Earning season

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The third quarter earnings season is at its end with investors preparing for the Christmas holidays. Of the 497 companies in the S&P 500 that have reported earnings to date for Q3 2018, 77.3% have reported earnings above analyst expectations. This is above the long-term average of 64% and in line with the previous quarter.

The Q3 2018 blended revenue growth estimate is 8.6%. Excluding the energy sector, the revenue growth estimate declines to 7.4%. During the reporting season, 61.6% of S&P 500 companies have reported Q3 2018 revenue above analyst expectations, which is above the long-term average of 60%.

The energy sector ended the reporting season with all companies in S&P 500 posted their Q3 2018 statements. The sector achieved the strongest growth rate in earnings (114.6%) and revenues (20.4%) on the year-on-year basis, mostly due to the stronger oil prices and increasing bullish sentiment of investors in the sector.

Consumer Discretionary sector also performed strongly with an increase in earnings by 25.3% and revenues by 7.7%. This is the largest sector in S&P 500 with 64 companies, 79% of which exceeded market expectations in their quarterly earnings statements. Consumer Discretionary also achieved the highest surprise factor in Factset analysts report.

Earnings estimates Q4 2018

During the first two months of the fourth quarter, analysts lowered earnings estimates for companies in the S&P 500. The Q4 bottom-up earnings per share estimate, which is an aggregation of the median EPS estimates of all of the companies in the index, has dropped by 2.6%.

Ten sectors have recorded a decline in their bottom-up earnings per share estimate during the first two months of the quarter, led by the Materials (-10.1%), Utilities (-7.5%), and Industrials (-5.8%) sectors. On the other hand, the Energy (+2.1%) sector is the only sector that has recorded an increase in their bottom-up earnings per share estimate during this time.

As the bottom-up EPS estimate for the index declined during the first two months of the quarter, the value of the S&P 500 also decreased during this same period.

Technology companies on the rise

During week two of the largest US technology giants reported their Q3 2018 earning statements, both exceeding analysts estimates.

Semiconductor company Broadcom declared declares 2.65 USD per share quarterly dividend, which represents a 51.4% increase after quarterly revenue and profit were above analysts’ estimates. Company’s business was strong demand for its enterprise storage and networking products from data centers, sending its shares up 5 percent in extended trading. The semiconductor device supplier posted non-GAAP earnings of 5.85 USD, up 27% year-over-year. The company’s revenue came to 5.44 billion USD, up 12% from the prior year.

For the full year, Broadcom expects revenue of 24.50 billion USD, above analysts’ estimates of 22.40 billion USD.

The stocks of the Hewlett Packard Enterprise advanced after the American multinational enterprise information technology company reported fiscal fourth-quarter results that exceeded analyst estimates on both the top and bottom lines. The company reported earnings of 0.45 USD per share on revenue of 7.95 billion USD, against expectations for earnings of 0.43 USD per share on revenue of 7.84 billion USD. HP Enterprise segments Hybrid IT and Intelligent Edge revenues were above estimates, while financial services were below analysts’ estimates.

Wall Street earnings to peak in 2019

The stock market slide won’t turn around in 2019 until rate hike expectations for the Federal Reserve stop rising and earnings estimates for companies by analysts stop falling, according to Bank of America Merrill Lynch Global Research.

The bank commented that the ‘Baby Bear’ market on Wall Street, which began in Q1 2018 is not yet over, expecting to turn tactically bullish once peak rate and trough EPS expectations signal “The Big Low”.

The culprit expected to affect asset returns and the pace of economic growth in 2019 is “an unprecedented level of global monetary policy divergence” as the US Federal Reserve continues to hike interest rates and other major central banks don’t. The Fed has raised rates three times in 2018 and is expected to hike once later this month. The central bank also expects to raise rates twice in 2019. However, latest signals show that the US Central bankers will step back and will easy with tightening of monetary policy.

Corporate earnings have grown sharply this year. During the first three quarters of 2018, the earnings of S&P 500 companies jumped by at least 25% on a year-over-year basis. Fourth-quarter earnings are also expected to be strong. However, the growth rate is likely to slow down as a boost from lower corporate taxes in the US fades.