Financial Professionals


Q3 Earnings: The Real Catalyst


The S&P 500® Index (SPX) continued to correct last week from its all-time high of 1729.86 established on the date of the last FOMC meeting, Wednesday, September 19. The 3.4% correction (Figure 1) reached a potential trough last Thursday of 1670.36, falling within the “critical cyclical support level” of 1660 to 1675 identified in my “S&P 500 Technical Formation” blog posted on September 24.

Figure 1 S&P 500 Index (SPX), 2013
Joe Terranova 10-7 1.1
Source: Bloomberg

I have received quite a few nudges on Twitter and other media platforms asking why I have not authored a blog specific to the kindergarten shenanigans being orchestrated by Washington D.C. policy makers. Quite candidly, while I have strong social viewpoints and understand the macro impact of the D.C. nonsense, investors should not be altering their portfolios based on the political noise.

More importantly, as I have suggested in previous blogs and highlight in my just-released Q4 playbook “Two Plus Two Equals Four,” investors need to pay attention to the technical formation of the SPX, as well as the upcoming Q3 earnings reporting season.

EPS growth for the Q3 reporting period is expected to reaccelerate from the 4% growth achieved in Q2, back to the current consensus estimate of 11%. If there is to be a real fundamental catalyst for markets before year’s end, there is a high probability that upcoming earnings will fill that role.

This week begins the SPX Q3 earnings season with 10 companies reporting. The most relevant will be this Friday morning when J.P. Morgan (JPM) and Wells Fargo (WFC) report. Year to date, the Financials SPDR ETF (XLF) (Figure 2) has appreciated 22.33% with most of that advance, 18.6%, occurring during the first half of 2013.

Figure 2 Financials SPDR ETF (XLF), 2013
Joe Terranova 10-7 1.2
Source: Bloomberg

SPX Earnings: Week of October 7 (no companies report Monday)

Tuesday, 10/8



EPS Estimate



Post Close

$ 0.05

Yum Brands


Post Close


Wednesday, 10/9




Family Dollar


Pre Open




Pre Open




Pre Open


Thursday, 10/10






Post Close




Post Close




Post Close


Friday, 10/11




J.P. Morgan


Pre Open


Wells Fargo


Pre Open


Source: Bloomberg

For the upcoming earnings season, investors should closely watch the weak expectations and subsequent reaction to Q3 earnings for the financials sector. After 37% EPS growth in Q1 and 28% in Q2, Q3 EPS growth will moderate toward 15% to 20%, with the consensus estimate for Q3 currently at 17%. The moderation in financials is expected based on weak contributions from mortgage banking, loans, and trading. While the fundamentals and expectations for financials have moderated, what is now relevant is whether the post earnings release price action suggests that weakness is already priced in.

Over the past few quarters, the SPX profit margin has begun to reaccelerate. Four quarters ago it stood at 8.31%. The subsequent three quarters have traced out gradual expansion each time toward the current 8.68%. Investor should watch closely to determine if that trend sustains itself. Should corporations continue to post better profit margins, the potential exists for that tailwind to combine with accelerating global economic growth, potentially lifting SPX profit margins toward 10% over the coming four to six quarters.

Consensus estimates for overall SPX EPS growth is currently at 11%, and here is the breakdown by sector.

Consensus EPS Estimates by Sector












Consumer Discretionary

Health Care

Consumer Staples







Source: Bloomberg

Finally, current estimates for sales growth by sector have strong expectations for consumer discretionary (+17%), materials (+8%), and industrials (+6%). Sales growth estimates for telecom are weakest (-10%). Also looking at tepid sales growth is the consumer staples sector (+1%), technology (+2%), and energy (+3%).

In the weeks that follow, the number of companies reporting earnings will intensify….

Week of October 15

  • 71 SPX companies report
  • 22 financial companies report, led by GS, C, USB, BAC, AXP, and MS
  • Technology earnings begin, led by YHOO, INTC, IBM, and GOOG

Week of October 21

  • 149 SPX companies report
  • 25 financial companies report, as insurance, asset managers, & exchanges begin
  • Consumer discretionary begins with 15 companies, including MCD, NFLX, and AMZN
  • 19 more technology companies, led by AAPL
  • Industrials begin with 24 companies, led by CAT

Week of October 28

  • 124 SPX companies report
  • 17 energy companies report, led by XOM & CVX
  • 14 consumer staples companies report
  • 13 utility companies report
  • 10 health care companies report

Week of November 4

  • 75 SPX companies report
  • Consumer discretionary and staples names dominate

Week of November 11

  • 21 SPX companies report

Week of November 18

17 SPX companies report

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.