On the earnings docket this morning, we got blowout numbers from Goldman Sachs (GS) and very strong results from UnitedHealth (UNH), while Baker Hughes (BHI) and Mattel (MAT) came up short. Many of us suspected that Goldman Sachs would be a key beneficiary of improved trading volumes in Q3, particularly in Goldman’s strong suit in the fixed income, currencies and commodities markets. And that’s exactly what their report this morning shows, with the bottom-line benefiting from lower compensation costs in the quarter. The weak indicated open for Goldman shares this morning could be a function of the overall negative sentiment for the market as a whole, but some could be erroneously latching on to the sequential decline in the investment bank’s results.
I would seriously caution against reading too much into sequential comparisons due to seasonality factors. The fact remains that the sharp slide in treasury yields in recent days has overshadowed otherwise good-enough bank sector results. And that makes perfect sense for the banks given the centrality of interest rates to their core lending business. Low interest rates further squeeze net interest rate margins that forces banks to make their earnings numbers primarily through cost cuts. Goldman is the least exposed to low interest rates and is likely one of the biggest beneficiaries of the accompanying market turmoil and increased volatility.
[Hear: Neil Dutta on Future Rate Hikes; Can the Fed Avoid a Tantrum by the Markets]
The updated Q3 earnings scorecard as of this morning shows that we now have seen results from 65 S&P 500 members that combined account for 18.8% of the index’s total market capitalization. Total earnings for these 65 companies are up +2.1% from the period last year, with 61.5% of the companies beating earnings estimates. Total revenues for these companies are up a much stronger +5.3%, with 55.4% beating top-line estimates. The Finance sector is the biggest earnings contributor to the S&P 500 index anyway, and it has even greater weight in the results thus far. The low earnings growth picture for the index is solely due to the Finance sector, whose results have been dragged down by tough comparisons at Bank of America (BAC).
Total earnings for the 39.9% of the Finance sector’s market cap that has reported Q3 results are down -6.1% on +4.6% higher revenues. Excluding Bank of America, the sector’s aggregate growth picture improves to +8.6% earnings growth thus far. Excluding the Finance sector as a whole, total earnings for the remaining S&P 500 members that have reported results are up +8.9% on +5.7% higher revenues.
As you can see, we are in the midst of Q3 earnings season, but the ongoing market mayhem isn’t due to what’s happening on the earnings front. The oft-cited global growth and deflation worries are for real and will eventually have a bearing on corporate earnings as well. But they aren’t getting corroborated from the admittedly small number of Q3 earnings reports that we have seen thus far. In fact, on most conventional comparative metrics, the Q3 earnings season is tracking closely what we had seen in the preceding reporting cycle.
