Stock Market Comment: Earnings season in full swing

• 30% of S&P 500 companies have already reported earnings for Q3

• Annual earnings growth on the index level is negative

• Third quarter of deteriorating margins in a row?

• Bellwethers for industrial and semiconductor sectors disappointed

• 6 Dow Jones companies to report earnings next week

The US earnings season is at its fullest therefore it may be wise to take a quick look at how companies coped in the third quarter of 2019. Around 30% of S&P 500 companies have already released their earnings reports and well-known pattern emerges - reports show higher earnings and revenue than market analysts suggested.

As it is usually the case, S&P 500 companies tend to beat market estimates during this earnings season. However, aggregate earnings growth for the 30% of S&P 500 companies that have already released their reports is negative. Miners and oil companies are among the worst performing sectors as commodity prices are much lower than they were a year ago. Source: Bloomberg

However, focusing on how actual results compare to estimates may distract investors from real dynamics. Unfortunately, these do not present too well. Taking a look at earnings reports already released, one can see that earnings of S&P 500 companies declined 0.35% YoY on the index level. A point to note is that earnings declined in the previous two quarters and third quarter in a row would mark the longest streak of declining earnings since Q4 2015-Q2 2016 period. Things look a bit brighter when we look only at indices of the largest companies - Dow Jones (US30) and S&P 100. Earnings growth for both indices is still positive but slowed considerably. Earnings reports highlight the fact that macro environment has deteriorated over the previous year with issues like Sino-US trade war taking its toll on businesses. Nevertheless, the US stock market indices sit within striking distance of all-time highs. It shows that recent upward move is to a huge extent driven by upbeat sentiment rather than fundamental situation.

US500 (S&P 500 futures underlying) is trading within an upward channel for two weeks already. However, the zone ranging near all-time highs managed to stop the index earlier this week. This is the final resistance for the index as breaking above would mean trading in an uncharted waters. When it comes to support levels to watch, the first near-term hurdle can be found at 2995 pts - lower limit of the upward channel. However, the key support - 2937 pts - is significantly lower. This level is marked with the lower limit of the Overbalance structure (yellow box) and breaking below it would, in theory, suggest trend reversal. Source: xStation5

When it comes to revenue dynamics, three large-cap indices - S&P 500, S&P 100 and Dow Jones - coped similar with annual growth rate falling in between 3.5% and 4%. However, such a situation - declining earnings and rising sales - continues to squeeze margins on the index level. Net margin for S&P 500 index is forecasted to drop to below 11%, marking the third quarter of margin deterioration in a row. If confirmed, it would be the longest such streak since Q1 2009-Q3 2009 period. Last but not least, there are some companies whose earnings reports are watched more closely than others. These companies are considered bellwethers for the global economy and, unfortunately, they have disappointed so far. Caterpillar (CAT.US), the world’s largest construction equipment maker, experienced a decline in earnings and revenue on the back of lacklustre demand from Asia. Boeing (BA.US) also disappointed significantly but in this case reasons were company-specific (737 MAX grounding). Report of Texas Instruments (TXN.US) can be named another source of concerns. One of the world’s biggest semiconductor manufacturers saw its earnings and revenue slide in the Q3 2019 and decided to lower guidance for the final quarter of the year, hinting that demand problems are likely to continue. 

However, as we have mentioned at the beginning - just 30% of S&P 500 companies reported their earnings already. Earnings marathon will continue at high speed until mid-November. Below we provide you with a calendar of releases scheduled for next week. 

Noteworthy S&P 500 companies reporting earnings next week. Among those one can find 6 Dow Jones members - Walgreens Boots Alliance, Pfizer, Merck & Co, Apple, Chevron and Exxon Mobil. Source: Bloomberg, XTB Research