S&P 500 3rd Quarter Earnings Update

Download the PDF version of this Educational Series.

October was a stormy down month. November, despite ending up 2%, was a rollercoaster-like month and December is shaping up to be another volatile month. Investor confidence has been shaken. Now would be a good time to look at fundamentals that underpin the market and it doesn’t get any more basic than earnings. At the end of the day, earnings and earnings projections are an integral part of what drive market returns – the price of a stock is based on investors’ expectations that the company will deliver positive earnings, either now or in the future. We are going to examine the 3rd quarter earnings results with 99.6% of the S&P 500 companies reporting.

In Q3 of 2018, the percentage of S&P 500 companies beating earnings came in at 70.2%, while misses were 20.1%, and in-line registered 9.7%. The chart below shows the S&P 500’s historical beats and misses since the 2nd quarter of 2012.

Historical-S&P 500 Earnings Beat/Miss/In-Line Percentages

Chart: Hanlon Investment Management, Data: S&P Dow Jones indices

In the 3rd quarter of 2018 on a sector level; Information Technology, Utilities, and Consumer Discretionary had the highest beat percentages booking 90.2%, 82.8%, and 80.7%, respectively. All sectors had beat percentages outpacing misses, but Real Estate had the highest percentage of misses coming in at 31.3%. This makes sense as recently rising interest rates have put additional pressure on the Real Estate and Housing areas. We can see this in the following chart, ranking the S&P sectors by beat percentage from highest to lowest.

S&P 500 Beat/Miss/In-Line Sector Breakdown

Chart: Hanlon Investment Management, Data: S&P Dow Jones indices

Of course, earnings “beats” are subject to analysts’ expectations, and if the bar is set too high, the data may be skewed to the downside. Investors should always look beyond the headline “beat/miss” news and look for insight on growth and profitability. Encouragingly, S&P 500 Sales Per Share rose a healthy 10.7% Year-Over-Year indicating that sales are moving ahead at a robust pace. Quarterly Operating Margins for the S&P 500 were up 12.2%, which as a 19.7% increase over the same quarter a year ago. Both metrics indicate healthy and robust growth.

S&P 500 Quarterly Sales Per Share

Chart: Hanlon Investment Management, Data: S&P Dow Jones indices

S&P 500 Quarterly Operating

Chart: Hanlon Investment Management, Data: S&P Dow Jones indices

And while the equity and bond markets have been volatile it looks like this volatility has helped to mute expectations for how many more hikes we can expect in the Federal Funds rate. The following chart shows how the probability for a rate hike at the December meeting has fallen with the volatility we have experienced so far in December.

Market Volatility Impact on Federal Fund Rate Probabilities

Hanlon Investment Management

While odds still favor a ¼% hike at the December meeting, further rate hikes look less certain following Chairman Jerome Powell’s dovish speech on November 28th, when he said the policy rate is now “just below” estimates of a level that neither brakes nor boosts a healthy economy, comments that many took as signaling the Fed’s three-year tightening cycle is drawing to a close.

Rates are still historically low and concerns that investors will suddenly abandon equities for fixed income may be overstated, particularly if U.S. companies can continue their strong earnings growth. If we consider that stocks in the S&P 500 “yield” approximately 5% annually in earnings, bond yields still do not offer a high enough return to push investors out of the equity markets.

10-Year US Treasury Yield


So, while the markets have been painfully volatile, the earnings growth and sales are trending upwards. Weathering the storm can be challenging, but a disciplined approach based on economic fundamental data is necessary in volatile times like these.

Download PDF

Past performance is not a guarantee of future results. This Educational Series is limited to the dissemination of general information pertaining to its investment advisory services and is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock and bond markets involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice. Hanlon has experienced periods of underperformance in the past and may also in the future. Hanlon Investment Management (“Hanlon”) is an SEC registered investment adviser with its principal place of business in the State of New Jersey. Hanlon and its representatives are in compliance with the current registration and notice filing requirement imposed upon registered investment advisers by those states in which Hanlon maintains clients. Hanlon may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by Hanlon with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hanlon, please contact Hanlon or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). For additional information about Hanlon, including fees and services, send for our disclosure statement as set forth on Form ADV from Hanlon using the contact information herein. Please read the disclosure statement carefully before you invest or send money. Not all Hanlon clients are in the strategies discussed herein.