All-Around Strength in Q3 Earnings Season

We are past the halfway mark in the Q3 earnings season, with results from 54% of the S&P 500 members already out. This reporting season has turned out to be very good, further strengthening the narrative of a favorable earnings backdrop that has been in place over the last few quarters.

The Technology sector became the latest to come out with impressive Q3 results, which will likely get reconfirmed with this week's results from Apple ( AAPL ) and Facebook ( FB ). In total, we have almost 900 companies on deck to release results this week, including 134 S&P 500 members. By the end of this week, we will have seen Q3 results from more than 80% of S&P 500 members. Unlike the large-cap stocks in the S&P 500 index, we are still at a relatively early stage in the small-cap reporting cycle. As of Friday, October 27th, we have seen results from almost 31% of the small-cap S&P 600 members, with the reporting tally crossing the halfway mark by the end of this week.

Let me make a quick comment about expectations from Apple and Facebook before highlighting four points about the Q3 earnings season as a whole.

Apple shares have regained the ground they lost following the latest iPhone announcement in September, but there is plenty of uncertainty in the market about the outlook for the higher-end iPhone X. The stock is now up +40.1% in the year-to-date period vs. +22.5% gain for the Zack Tech sector and +14.2% gain for the S&P 500 index. This strong year-to-date performance notwithstanding, the stock has lagged the sector as well as the broader market since the September 12th product announcement.

The company is expected to earn $1.86 per share on $51.17 billion, up from $1.66 per share on $46.56 billion in the year-earlier period. The company has handily beaten estimates in each of the last three quarters. More than EPS and revenue surprises, the key metric for the market will be iPhone shipments with the Zacks Consensus estimate of 46.42 million units in the period, which will be up from 45.5 million units shipped in the year-earlier quarter.

Apple will report Q3 results after the market's close on Thursday, November 2nd.

Facebook shares have been star performers this year, with the sock up +54.3% vs. +22.5% gain for the Zacks Tech sector and +14.2% gain for the S&P 500 index. Facebook is scheduled to report results after the market's close on Wednesday November 1st, with the company expected to earn $1.30 per share on $9.88 billion in revenues, up +19.5% and +40.9% from the year-earlier level, respectively.

Performance in terms of advertising revenue and active users will be even more material for the stock price than revenues and EPS. The expectation is for ad revenues of $9.71 billion (up from $6.8 billion in the year-earlier period) and daily active users tally of 1.371 billion (up from 1.179 billion in 2016 Q3).

Here are the four key points about the Q3 earnings season.

First , there is clear momentum on the revenue front, with growth notably accelerating from other recent periods. Total revenues for the 272 S&P 500 members that have reported results, as of Friday, October 27th, are up +6.7% from the same period last year, which compares to +5.5% top-line growth for the same group of companies in the preceding quarter and still lower average growth rates in the prior periods, as the comparison chart below shows.

Second , the above-average proportion of positive surprises that we saw in the preceding period has continued this earnings season as well. We typically don't give positive surprises a lot of weight in evaluating or assessing an earnings season since we all know that management teams are experts in managing expectations. Even then, the trend emerging in the Q3 earnings season is noteworthy for two reasons. First, estimates for the quarter had not fallen by as much as had historically been the case. Second, the proportion of positive revenue surprises, a much harder variable to manipulate relative to earnings, is only a shade below the preceding quarter's record level.

The chart below shows the proportion of 272 S&P 500 members that have beaten both EPS and revenue estimates and how that compares to historical periods.

Third , the revisions trend for the December quarter is shaping up to be unusually favorable. The pattern over the last few years has been that as the quarterly earnings reporting season gets underway, estimates for the following quarter would start coming down. This trend improved a bit over the last few quarters when estimates would not fall by as much as was historically the case, but they were nevertheless coming down.

The unusual thing about the Q4 estimates is that they actually went up at first and have started coming down only over the last couple of days, which has brought Q4 growth expectations to where they stood at the start of the period. This is totally different from what we would typically the comparable periods of other earnings seasons over the last few years. This will most likely change as more companies report Q3 results and manage the market's expectations for the December quarter, but it is nevertheless an unusually positive development.

The chart below shows the evolution of Q4 estimates since the quarter got underway.

, total Q3 earnings for the S&P 500 index are on track to reach a new all-time quarterly record, surpassing the previous record reached in the preceding earnings season, as the chart below shows.

Four

Please note that the $299.8 billion is the blended earnings total that combines the actual earnings reported in the results that have come out with estimates for the still-to-come companies.

Q3 Earnings Season Scorecard (as of Friday, October 27, 2017)

We now have Q3 results from 272 S&P 500 members that combined account for 64.2% of the index's total market capitalization. Total earnings for these companies are up +8.7% from the same period last year on +6.7% higher revenues, with 75.7% beating EPS estimates and 66.2% beating revenue estimates.

The charts below compare the Q3 results thus far from the 272 index members with what we had seen from the same group of companies in other recent periods.

Looking at Q3 as a whole, combining the actual results from the 272 S&P 500 members that have come out with estimates for the still-to-come 228 index members, total earnings are expected to be up +5.4% from the same period last year on +5.5% higher revenues. Excluding the weak results from the Finance sector, total earnings for the rest of the index would be up +7.7% on +6.1% revenue growth. The table below shows the summary picture for Q3, contrasted with what was actually achieved in Q2.

The chart below shows Q3 earnings growth expectations contrasted with what is expected in the following three quarters and actual results in the preceding 5 quarters. As you can see in the chart below, the growth pace is expected to decelerate from the double-digit level of the first two quarters of the year, but is expected to accelerate to ramp back up from the current period onwards.

Technology Sector Scorecard

For the Technology sector, we now have results from 54.4% of the sector's market cap in the S&P 500 index. Total earnings for these Tech sector companies are up +22% from the same period last year on +8% higher revenues, with 79.3% beating EPS estimates and 86.2% beating revenue estimates.

The chart below compares the growth pace (earnings and revenue) and proportion of positive surprises for these companies with what we saw from this same group of Tech sector companies in other recent periods.

Looking at Q3 earnings and revenue expectations for the sector as a whole, combining the reported actual results with the still-to-come estimates, Tech sector earnings are expected to be up +16% from the same period last year on +7.6% higher revenues.

Note: Sheraz Mian manages the Zacks equity research department. He is an acknowledged earnings expert whose commentaries and analyses appear on Zacks.com and in the print and electronic media. His weekly earnings related articles include Earnings Trends and Earnings Preview . He manages the Zacks Top 10 and Focus List portfolios and writes the Weekly Market Analysis article for Zacks Premium subscribers.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.