The Xchange Blog

Earnings Season Review: 4th Quarter 2018 Results

Before we examine the results of the first earnings season of calendar year 2019, let’s quickly review some of the numbers and takeaways from Q4 2018 earnings results. The following focuses on the results for the S&P 500 at both the broad and GICS sector levels. From an aggregate earnings perspective, the S&P 500, as a whole, reported aggregate earnings to the tune of ~$367.87B, which was 0.99% higher than expectations for the quarter. This was the lowest earnings surprise for 2018. For perspective, Q3 2018 saw an aggregate surprise in earnings to the tune of +6.71%, and Q2 2018 saw an aggregate surprise in earnings of +5.43%. On the sector level, the stark leader in earnings surprise to the upside was the Energy sector, where actual earnings of ~$21.73B handily beat expectations (~$18.38B) amid a volatile period for WTI Crude. Communication Services names and Consumer Discretionary names were also notable “upside surprise” Sectors when it came to bottom lines.

Figure 1: Aggregate Sales & Earnings Surprise
 
Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

From a top-line perspective, the S&P 500 reported a surprise sales figure of 0.99%, which was higher than Q3 2018 (+0.69%), but lower than Q2 2018 (+1.37%). The S&P 500 reported aggregate sales of ~$3.09T compared to estimates of ~$3.06T. At the sector level, Health Care reported the largest aggregate dollar amount in terms of sales; $510.88B. Health Care also provided the 2nd largest beat versus expectations with results topping analyst consensus by 2.21%. Not surprisingly, Consumer Discretionary and Consumer Staples reported the 2nd and 3rd largest top-line results with $418.86B and $392.24B respectively; however, these results were more in-line with expectations. The Utilities Sector reported sales that beat expectations by 4.09%, which was the largest upside surprise at the sector level by almost 2%.

In terms of the number of names, or percentage of names within a sector, that beat top-line and bottom-line expectations, Health Care was again a leader. Health Care had the largest percentage of names (52 out of 62) report sales that were better than expected, and had the third largest percentage of names (49 out of 62) report earnings that topped consensus. The Materials and Financials Sectors were less impressive, especially at the top-line, as only 37.50% and 49.25% of names reported better-than-expected results. The S&P 500, as a whole, had 300 names (60.36%) report sales that beat expectations, and had 357 names (72.86%) that reported earnings that beat expectations.

Figure 2: % of Names Delivering Better-than-Expected Results

Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

So what did this all mean for performance? While forward guidance is also a significant driver of market reaction and performance throughout earnings season, top-line and bottom-line results at the single stock level can also drive notable sector-level moves over the short-term, especially for baskets in which a few big names (and their results) have a large impact across the entire space. The following Figures 3 and 4 shows the average 1-day, 2-day, and 5-day moves following results that were announced on any given day, for all names, throughout Q4 2018 earnings season.

Figure 3: Aggregate Sales Surprise and 1D, 2D, and 5D Performance Results

  Sales 1D 2D 5D
  Aggregate Surprise Price Movement Price Movement Price Movement
S&P 500 0.99% 0.94% 1.17% 1.75%
Consumer Discretionary 1.09% 3.07% 2.63% 3.22%
Financials 0.99% 1.33% 2.11% 2.90%
Information Technology 0.09% 1.93% 2.25% 2.77%
Industrials 1.52% 1.36% 1.84% 2.75%
Real Estate 1.46% 0.04% 0.60% 1.43%
Utilities 4.09% 0.01% 0.26% 1.01%
Health Care 2.21% 0.17% 0.55% 0.60%
Materials -1.80% 0.29% 0.15% 0.40%
Communication Services 0.63% -1.49% -0.88% -0.07%
Energy 0.77% 0.18% -0.11% -0.21%
Consumer Staples -0.08% -0.98% -1.46% -0.68%

Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

Figure 4: Aggregate Earnings Surprise and 1D, 2D, and 5D Performance Results

  Earnings 1D 2D 5D
  Aggregate Surprise Price Movement Price Movement Price Movement
S&P 500 3.88% 0.94% 1.17% 1.75%
Consumer Discretionary 5.70% 3.07% 2.63% 3.22%
Financials 1.57% 1.33% 2.11% 2.90%
Information Technology 2.78% 1.93% 2.25% 2.77%
Industrials 3.37% 1.36% 1.84% 2.75%
Real Estate 0.13% 0.04% 0.60% 1.43%
Utilities 0.79% 0.01% 0.26% 1.01%
Health Care 2.32% 0.17% 0.55% 0.60%
Materials -0.74% 0.29% 0.15% 0.40%
Communication Services 7.88% -1.49% -0.88% -0.07%
Energy 18.22% 0.18% -0.11% -0.21%
Consumer Staples 2.42% -0.98% -1.46% -0.68%

Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

Some notable takeaways:

  • Investors should remember that the majority of these earnings results came out during the last half of January, where the S&P 500 was experiencing one of the best starts to the year in quite some time.
  • The earnings “upside surprise” throughout Information Technology names was notable, as it was the lowest over the last 8 reporting seasons.
  • Information Technology Sector “upside surprise” in sales was just 0.09%, again, the lowest of the previous 8 reporting seasons.
  • Despite this, the average 1D, 2D, and 5D moves in the Sector following reporting days was + 1.93%, 2.25%, and 2.77%, respectively.
  • The lack of upside in the Energy sector following results that showed significant earnings stability throughout a volatile period for WTI Crude suggests that the trading correlation and sensitivity to moves in the underlying commodity has potentially heightened.
  • Consumer Discretionary names exhibited the largest 1D, 2D, and 5D average moves.
  • Communication Services names exhibited some of the lowest 1D, 2D, and 5D average moves.
  • The move in the 10-Year was likely a major driver of the more “interest rate sensitive” sectors, such as Real Estate and Utilities.
  • Financials did quite well on the back of a top-line beat that was better than the previous quarter, and did well despite a flattening yield curve.
  • Average 1D, 2D, and 5D performance throughout Health Care names was relatively muted, despite reporting the largest top-line beat versus expectations over the last 8 reporting seasons.

 

Figure 5: Average 5D Price Reactions at the Sector Level & Aggregate Sales Surprise

Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

Figure 6: Average 5D Price Reactions at the Sector Level & Aggregate Earnings Surprise

Source: Bloomberg Finance, L.P. as of December 31, 2019. Past performance is not indicative of future results. One cannot invest directly in an index.

 


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