Earnings trend

The earnings trends will determine the fate of the market. Going by current trends it is a mix picture.

The end of the third quarter has been marked by a decline in earnings estimate revisions. The total number of estimate revisions last week, based on a four-week rolling period, was 3202 – about a quarter of what we saw in late August.

There are two ways to look at this. The bullish argument is that earnings warnings season has been basically non-existent. Relatively few companies cut their forecasts over the past few weeks. The negative argument is that growth rates are slowly eroding. The average full-year projected growth rate for companies within the Zacks Rank universe, excluding outliers, is 21.3%. At the end of August, analysts were projecting 23.1% growth.

With the second quarter behind us and the third quarter reporting season still ahead, the number of analyst estimate revisions is near a seasonal low point. However, we can still utilize these estimates to calculate the revisions ratio. There were still 1,165 analyst EPS revisions last month. Unfortunately, 641 of those revisions were to the downside.

This marks the third week now that negative revisions have outnumbered positives. This downward rally makes up the only period of the entire year where the revisions ratio has been below one. Still, before delving deeper, consider the overall earnings picture. The S&P 500 is set to post double-digit median growth for both this year and next. The downward revisions trend will have to hold well into the third quarter reporting season for the overall earnings outlook to sour.