Every quarter, companies report earnings to let investors know how profitable the companies were during the quarter. When profits grow, a company’s share price may move higher. When profits decline, a company’s share price may move lower.
For five consecutive quarters, the Standard & Poor’s 500 Index (S&P 500) has been in an earnings recession – the earnings for the companies in the index have declined every quarter. Another earnings decline is expected for the third quarter. As of September 30, analysts estimated a -2.0 percent earnings decline for the third quarter, according to FactSet.
A negative estimate doesn’t necessarily mean all S&P 500 companies will do poorly. Certain sectors of the market have been performing a lot worse than others. Of the 11 sectors in the S&P 500, only three – Energy, Industrials, and Telecommunication Services – were expected to have negative earnings. For example, on September 30, estimates suggested the Energy sector would experience a year-over-year earnings decline of -67.2 percent, while Utilities would see earnings growth of +5.3 percent.
Only 7 percent of S&P 500 companies have shared third quarter earnings so far. Through last week, Energy sector earnings were weaker than expected (-72.5 percent) and Utilities earnings were stronger (+6.1 percent). FactSet detailed S&P 500 companies’ performance through Friday:
“…76 percent have reported actual EPS [earnings per share] above the mean EPS estimate, 3 percent have reported actual EPS equal to the mean EPS estimate, and 21 percent have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (70 percent) average and above the 5-year (67 percent) average.”
Fourth quarter offers a brighter earnings outlook. S&P 500 companies are expected to see profits increase. Analysts’ current estimates suggest earnings will be up 5.3 percent during the period.