November – 2019

Insights From Q3 2019 Earnings Season

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The US market is nearing the end of earnings season for the third quarter. As of Friday, November 8th, roughly 90% of S&P 500 companies have reported. Based on data thus far, third quarter earnings declined 2.4% year over year, largely due to declines in Energy and Materials stocks. However, companies are generally beating expectations as 60% of companies have reported revenue that was above consensus and 75% of companies have beat their earnings estimates.

The chart below shows performance of different sectors during Q3 2019 earnings. Green bars mean companies are beating estimates, yellow reflects in line performance, and red shows an earnings miss. The data shows that Consumer Staples, Health Care and Information Technology have had the highest percentage of companies exceeding estimates while Materials and Energy were weaker.

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Additionally, Information Technology and Health Care sectors have beaten earnings estimates by wider margins than other sectors. Information Technology companies have reported better than expected earnings by a margin of 7.0% and Health Care beat by an average of 6.8%. It is generally well regarded for companies to beat by wider margins as it shows a better than expected business environment for those industries. This can be seen in the stock price performance of Information Technology and Health Care stocks since earnings season began, outperforming the overall market during that time.

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In regard to valuation, the 12-month forward price-to-earnings (P/E) ratio of the S&P 500 is currently at 17.4x, which is above the 5-year average of 16.6x and a 10-year average of 14.9x. As we look forward, earnings are expected to again decline in the fourth quarter of 2019 before rebounding in 2020. Because investors tend to look forward, an increase in the P/E multiple despite a decline in earnings suggests investors are relatively optimistic. At Gradient, we also remain relatively constructive on the US stock market and would look at any prolonged weakness as an opportunity to buy.

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Past Reflections