Random Thoughts On Earnings

Even though the calendar now reads 2020, Wall Street will soon be revisiting 2019, in general, and the fourth quarter, in particular, at least from an earnings per share (EPS) growth perspective.

The reporting period for Q4 2019 EPS ramps up in earnest on Monday January 13. Wall Street analysts currently predict that Q4 S&P 500 EPS will decline 2.0% from the level reported for Q4 2018, according many wall street estimates.

At first glance, investors understandably might be a bit unnerved, as it would represent the second consecutive quarterly decline in S&P 500 EPS. What’s more, it would also meet the definition of an earnings recession, which historically preceded economic recessions. Yet investors shouldn’t get too worked up just yet, because Q3 was the 31st consecutive quarter in which the reported EPS change exceeded the estimated EPS change.

In addition, in those prior 31 quarters, actual results outpaced forecasts by an average 3.8 percentage points. So should history repeat itself in Q4, and there’s no guarantee it will, EPS growth may come in closer to a 2.0% advance than a 2.0% shortfall.

Digging a bit deeper, Wall Street consensus estimates point to the strongest growth coming from the financials, health care and utilities sectors, while consumer discretionary, energy, materials and real estate are slated to record double-digit declines.