MARKET EARNINGS
The book is finally closed on S&P500 earnings for 3Q99. Earnings were up 22.7% over 3Q98, the best gain since 1Q95.
Relative to expectations, it was also a good quarter. Among the 500 companies, 64% beat expectations, 24% matched, and 12% fell short. That compares favorably with the five year averages of 56%, 19%, and 26%, respectively. It is similar to the results in 1Q99 and 2Q99.
However, even though a large number of companies than usual are beating and/or meeting the estimates, they are doing so by smaller amounts on average than in recent quarters. In 1Q99, analysts missed the inflection point in the downward slope of 1998 and continued slashing estimates in those companies that had been impacted by the overseas economic problems. As a result, the 1Q99 results beat the individual company estimates at the time each reported by an average of 5.6%, well above the five year average of 2.7%. As the analysts learned from their 1Q99 experience, the results in 2Q99 beat the estimates by 4.1%, a smaller amount than in 1Q99, but still well above the five year average. This quarter, the 3.0% that results beat the estimates by indicates a return to more normal surprise patterns.
The sectors that beat the estimates by the widest margin were energy, basic materials (papers, metals, chemicals), and technology, each of which came in on average 5% above expectations. Analysts were not raising their estimates for the oil producers and paper & forest products companies fast enough to match the strength of the recovery in those areas. Technology usually beats the estimates by more than most other sectors do. The transportation sector beat the estimates by less than did all the other sectors, as analysts underestimated the impact of the higher fuel costs.
As for year over year gains, technology remained one of the stars. After showing year over year earnings gains of 42% in both 1Q99 and 2Q99, growth only slipped to 35% despite comparing to somewhat more normal results in 3Q98. But the real star was energy. After being the worst performer in 1Q99 (down 45%) and again in 2Q99 (down 20%), the energy sector was up a roaring 54% in 3Q99 (and is estimated to be up 96% in 4Q99). Other sectors that did well were consumer cyclicals (up 35% with help from an easy comparison to a GM strike depressed 3Q98), and financials (up 34% with help from an easy comparison to a 3Q98 depressed by big trading losses at the major banks and brokers).
Transports had the poorest performance, with earnings down 15% due to higher fuel costs and due to overcapacity in the airlines. Consumer staples were next worst, with a gain of only 4% as the earnings recovery in their overseas operations has been slower in coming than had been expected.
The 22.7% earnings growth for the overall S&P500 will likely be the peak for some time, as the comparisons to unusually depressed earnings in some sectors or industries revert back to more normal ones. Earnings growth for 4Q99 appears likely to come in at 19%. During the 3Q99 reporting season, 4Q99 estimates were being revised down more so than normal, but that seems to have abated, and revision activity may be reverting back to more normal patterns.
Earnings growth for the full 1999 year will be about 17%. Earnings growth next year is likely to taper off to about 13%. However, that would still be well above the long-term 7% average. Leading the way will be energy (currently estimated to be up 38%) and basic materials (up 35%), as those two sectors benefit from higher prices and increased demand overseas, and technology (up 28%). The expected growth in technology is particularly impressive since it is in comparison to a strong 1999.
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