Expectations are Lowest Since the 2015-16 EPS Recession

The third quarter has come to an end. Wall Street estimates now call for a 4.2% year-over-year decline in S&P 500 operating EPS for the quarter, according to S&P Capital.

This projected decline follows the more than 2% gain reported for Q2. Seven sectors are expected to post declines, led by energy, materials and real estate, while increases should be greatest in financials, health care and industrials.

We feel no EPS recession is on the horizon, however, as Q4 estimates call for a 2.8% advance. Full-year 2019 results will likely be up only 0.7% but then increase by 10.3% in 2020, while S&P 500 revenues should rise 3.7% in Q3 and 4.4% for all this year, versus the gain of 5.8% expected in 2020. The S&P 500’s P/E on next-12-month (NTM) EPS stands at 17.5x, vs. the average multiple of 16.4x since 2000.

The S&P 500 is expected to report a year-on-year decline in EPS in Q3, its first fall-off since the earnings recession of 2015-16. Q3 declines are also expected for six of the 11 sectors in the S&P 500 driven by a slowing U.S. economy as a result of the lingering trade dispute with China. Should history repeat itself, however, the final tally of Q3 results will likely see EPS growth approach the positive zone, as actual EPS exceeded initial estimates in each of the last 30 quarters by an average of nearly four percentage points.