The bulk of the Q4 earnings season is now behind us, with results from only about 18% of the S&P 500 members still awaited. The Retail sector is the only one at this stage that has a sizable number of reports still to come, particularly from the traditional retailers like Wal-Mart (WMT), Macy’s (M) and Nordstrom (JWN) that are on deck to report results this week. With another 49 index members reporting results this week, the Q4 earnings season will have come to an end for 92% of S&P 500 members by the end of this week.
As we have been saying for the last many weeks, the Q4 earnings season has turned out to be a good one. Not only is growth on track to be the highest in two years, but total earnings for the quarter are also on track to be a new quarterly record. Please recall that earnings growth turned positive only in 2016 Q3, having declined in each of the preceding five quarters, as the chart below of year-over-year earnings growth for the S&P 500 index shows.
Importantly, the positive Q4 growth isn’t a result of easy comparisons, but actually a function of strong gains in actual earnings. In fact, the overall tally of Q4 earnings for the S&P 500 index is on track to reach an all-time record for the index, surpassing the previous record achieved in 2014 Q4. The chart below shows the quarterly earnings totals for index, contrasting the highlighted Q4 tally with actual results from the last 8 quarters and expected tallies in the coming 4 quarters.
As you can see, this record isn’t expected to last very long, with growth expected to ramp up notably in the coming quarters.
One other positive for this earnings season is the relatively modest negative revisions to current-quarter (2017 Q1) estimates; they have come down, but not by as much as has historically been the case. The chart below shows evolution of Q1 estimates since the start of the period.
Can Retail Maintain This Momentum?
Retail sector stocks have lagged the broader market since the November elections, with the Zacks Retail sector gaining +5.7% since November 8 vs. the +9.1% gain for the S&P 500 index in that same time period. We should keep in mind, however, that a number of Retail sector industries like the department stores, the discounters and others have done a lot worse, likely reflecting worries about unfavorable tax policy changes that are adding to the many issues that have been plaguing these industries already. You can see this in the recent stock-price performance of some of these industries, particularly since the elections. The Zacks Department Stores industry has lost -11.8% over its value since November 8th, with Macy’s down -15.3% and Nordstrom down -12.6% in that same time period.
We will see how these companies report in the coming days, but the group’s recent underformance sets them up for outsized gains on positive comps. The Retail sector results that we have seen already, admittedly weighted more towards the restaurant and e-Commerce industries, have been on the weak side.
Total earnings for the 46.5% of Retail sector companies in the S&P 500 index members that have reported Q4 results already are up +5.8% from the same period last year on +7.1% higher revenues, with 55% beating consensus EPS estimates and a much weaker 20% beating revenue estimates. These are weaker results than we have seen from the same group of retailers in other recent periods, as the comparison charts below show.
