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Q4 US Earnings May See a Recovery

20 January 2020USEquities

Citi analysts believe the S&P 500 EPS may have bottomed in Q3 2019 and profit growth could accelerate into 2020 as a strong US consumer and recovering global demand drive a pickup in industrial production.

  • As the Q4 2019 earnings season in US unfolds, Citi analysts expect S&P 500 companies to report a recovery in profits after a modest earnings contraction in Q3. Though consensus expectations point to a roughly 1% YoY decline in Q4 earnings per share (EPS), Citi analysts think bottom-up estimates may be under-estimating earnings results, as they have in each of the last 42 quarters. Q4 surprises tend to be somewhat smaller in magnitude than other quarters, Citi analysts expect EPS growth of 1.5-2% in Q4, which would bring overall earnings growth for 2019 to 1.3%
  • A global manufacturing rebound is expected to lead US and global EPS growth to 7% this year. Consensus expectations for 2020 are still a bit on the optimistic side at 10%, though analysts may revise forecasts lower as firms reset expectations for the new year. Looking at historical trends, substantial revisions could be seen to 2020 EPS during the Q4 reporting season, setting the stage for stronger EPS beats in Q1.

    Q4 US Earnings May See a Recovery
    Past performance does not guarantee future results, real results may fluctuate.
  • Sectors: Though the energy sector’s earnings growth was the worst performing sector in the S&P last year, with energy EPS contracting by 24.2% in the first 9 months of the year, it appears attractive from a tactical perspective. Consensus expectations for Q4 look even more gloomy, expecting a 38% YoY decline, but Citi analysts think this may be too bearish, particularly since oil rallied 13% during the quarter as global demand appeared to pick up. Overly bearish expectations and positioning could reverse quickly if a cyclical rebound materializes. Health care, another of Citi analysts’ favored sectors, continues to deliver modest but consistent earnings growth, despite some political news last year which turned the sector’s outperformance around.

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