The effects of the prolonged trade war between US and China against US companies have led investors to brace themselves this week as Wall Street's third quarter earnings season increases.
FactSet data shows that analysts expect third-quarter revenue to fall by 4.1% on an annual basis (Y-o-Y). This follows a fall of 0.4% in the second quarter and 0.3% in the first. If confirmed, the third quarter of 2019 would be the first time in three years that the reference index reported three consecutive quarters of earnings declines and the largest decline in earnings reported by the index since the first quarter of 2016 when it was 6.9% shrunk.
At sector level, six are expected to report a Y-o-Y drop in revenue, led by, and. Although only four are expected to report earnings growth on an annual basis, led by and
is the prediction for the single sector to achieve a fixed Y-o-Y result.
S&P 500 Earnings Projections
The expected revenue growth is equally worrying. The estimated YoY rate for Q3 2019 is only 2.7% and would be the lowest revenue growth rate for the index since Q3 2016. Three of the eleven sectors are expected to report a YoY revenue decline, again led by the Materials and Energy sectors. Meanwhile, eight sectors are reporting Y-o-Y revenue growth, with Utilities leading.
2 sectors disappointed
1. Energy: sliding prices for crude oil
Lower prices are taking their toll in the energy sector, which is expected to report the largest Y-o-Y drop in profits in all eleven sectors by -35.2%. The average oil price in the June-September period was $ 56.44, a decrease of 19% compared to the same period a year earlier.
Three of the six sub-industries in the energy sector are expected to report a decline in revenue for the quarter. Shares in the group are expected to do the worst, with an expected earnings per share of no less than -46%. and Oil and gas refining and marketing are also expected to see a decrease in their respective revenues, by -45% and -15%.
West Texas crude fell 7.5% in the third quarter alone, 25 of the 28 companies in the group (89%) saw their average EPS estimate drop, led by Exxon Mobil (NYSE 🙂 (down from $ 1.15 to $ 0.73) , Chevron (NYSE 🙂 (up to $ 1.66 from $ 2.10) and Occidental Petroleum (NYSE 🙂 (up to $ 0.51 from $ 1.00).
2. Materials: Droping commodity prices
The Materials sector is expected to report the third-highest Y-o-Y profit decline of all eleven sectors, with a dismal -9.3%. The sector is also expected to experience the largest Y-o-Y sales decline, at -12.8%, as sliding commodity prices help drive the decline.
Two of the four sub-industries in the sector are expected to see a double-digit fall in profits: (-55%) and (-15%). The companies that are expected to lead the profit slide for the sector are Nucor (19459114) NYSE 🙂 and Freeport-McMoran (NYSE :). For Nucor, the average Q3 2019 EPS estimate is $ 0.87, while EPS was $ 2.33 a year ago. For Freeport-McMoRan, the average profit forecast for the third quarter of 2019 is $ 0.02, compared to the annual profit of $ 0.35.
1 sector expects strong results
1. Utility programs: all sub-industries predict growth
The utilities sector will benefit from the wind in the back of the Federal Reserve, as it is expected to report the highest Y-o-Y earnings growth of all eleven sectors, with + 4.2%.
All five of the sub-industries in the sector are expected to report EPS growth, with Gas Utilities expecting a two-digit increase (+ 20%).
At company level, Duke Energy (NYSE 🙂 and Nextera Energy (NYSE 🙂 are two to watch. The sales forecast of Duke Energy is 7.13 billion compared to 6.63 billion a year ago, while Nextera Energy is expected to report 5.15 billion in revenues, while beating the value of 4.42 billion last year.
The most important ETF in the sector – the Utilities Select Sector SPDR Fund (NYSE 🙂 – increased by 11% in the third quarter, surpassing the 8% increase in the S&P 500 over the same period. XLU almost always acts high, because the group often fares better in an environment with low interest rates due to their attractive dividend yield.
