Microsoft, Google, Dow Chemicals and Apple are part of Zacks Earnings Preview:

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Oct 28, 2013, 09:30 ET

CHICAGO, Oct. 28, 2013 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Google (Nasdaq:GOOG-Free Report), Microsoft (Nasdaq:MSFT-Free Report), Apple (Nasdaq:AAPL-Free Report) and Dow Chemicals (NYSE:DOW-Free Report).

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Q3 Earnings Season Not So Bad, After All

Total earnings for the 244 S&P 500 companies that have reported results are up +8.1% with 68% beating earnings expectations, while total revenues for these companies are up +3.4% and 48.8% are beating top-line expectations.

This is better performance than what this same group of 244 companies in Q2 and the 4-quarter average, though revenue growth is a bit light. The ratio of companies coming ahead of earnings expectations is significantly better than Q2 and modestly so relative to the 4-quarter average, likely indicating that estimates were too low.

The +8.1% earnings growth thus far in Q3 compares to +7.7% growth in Q2 and the 4-quarter average of +4.7%. The revenue growth performance is a weaker, with the current +3.4% growth rate modestly down from +3.7% in Q2 and the 4-quarter average of +4.4%. Unlike recent quarters, The Finance sector isn't driving growth in Q3. Total earnings growth outside of Finance of +6.5% compares to no growth (0%) in Q2 and the average +0.2% growth in the preceding four quarters. Improved growth at the Technology, Basic Materials, Transportation, and Energy sectors accounts for the ex-Finance strength in Q3.

Total earnings for the 57.7% of the Technology sector's market capitalization that have reported results already are up +10.8% from the same period last year, which compares to earnings declines of -7.6% in Q2 and the 4-quarter average of -1.5%.

At the medium industry level (or M level), we have 7 industries in the Technology sector, of which only Telecom Services hasn't reported any results yet. The growth picture has improved for each of the other six industries, with the improvement particularly notable for the Software & Services and Semiconductor industries. These two industries combined account for 41% of the sector's total earnings. The +21% total earnings growth at Google (Nasdaq:GOOG-Free Report) and +17.4% at Microsoft (Nasdaq:MSFT-Free Report) account for the positive growth profile of the Software & Services industry.

Total earnings for the Computer & Office Equipment industry, the biggest industry in the sector accounting for 43% of the sector's total earnings, are up a much more modest +3.3% at this stage. Tough comparisons for Apple (Nasdaq:AAPL-Free Report) will push this industry into the negative and bring down the overall growth for the sector as a whole.

Total earnings for the Basic Materials sector are up +25.6% on +5.2% higher revenues. The improvement in the sector's growth numbers is primarily a function of easy comparisons, particularly in the sector's dominant chemicals industry (69% of total sector earnings come from the Chemicals & Fertilizer industry). Chemicals earnings are up +14.1% at this stage, largely due to easy comparisons at Dow Chemicals (NYSE:DOW-Free Report). Dow missed and guided lower, but its Q3 total earnings were up +37.6% year over year.

The Composite Growth Picture

Total earnings for the S&P 500 as a whole, combining the results from the 244 that have reported with estimates for the remaining for the 256, is for growth of +3.2% on +1.3% higher revenues. This compares to +3.4% earnings growth in Q2 on flat revenues.

Only four sectors are expected to have double-digit earnings growth in Q3 – Finance (+11.4%), Construction (+28.8%), Transportation (+13.5%), and Business Services (+10.9%). Excluding Finance, total earnings for the S&P 500 are expected to be up +1.3% on +2.2% higher revenues, which is up from a decline of -2.4% in total earnings on +1.1% higher revenues in Q2. Given the trend we have seen thus far, actual earnings growth in Q3, when all reports are in, will most likely be better than what saw in the first two quarters of the year – likely in the +4% range.

Q4 Estimates Coming Down

Estimates for Q4 have started coming down, though they still have plenty of room to go before reaching 'reasonable' levels. The chart below shows consensus earnings growth rates for the next two quarters, the composite estimates for Q3 and the actual growth rates for the first two quarters of the year.

The current +8.9% earnings growth in Q4 is down from +9.5% last week and above +10% a few weeks back.

About the Zacks Rank

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +28%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have significantly underperformed the S&P 500 (+3% versus +10%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

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