Twitter, DuPont, Bank of Americaand Merck are part of Zacks Earnings Preview:

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Oct 27, 2014, 09:30 ET

CHICAGO, Oct. 27, 2014 /PRNewswire/ -- Zacks.com releases the list of companies likely to issue earnings surprises. This week's list includes Twitter (NYSE:TWTR-Free Report), DuPont (NYSE:DD-Free Report), Bank of America (NYSE:BAC-Free Report) and Merck (NYSE:MRK-Free Report).

To see more earnings analysis, visit http://at.zacks.com/?id=3207.

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Q3 Earning: Weak Growth & Guidance

We are in the heart of the Q3 earnings season with a deluge of announcements this week. In total, we should see earnings reports from more than 950 companies, including 153 S&P 500 members. The bulk of the reporting season will be behind us by the end of this week as we will have seen results from 361 of the S&P 500 members by then. This week's reporting docket presents a blend of companies from different industries, ranging from 'growthy' players like Twitter (NYSE:TWTR-Free Report) to DuPont (NYSE:DD-Free Report) and plenty in the middle.

We will see what the rest of this reporting season brings, but the picture emerging from what we have seen already is fairly decent. Earnings aren't great, but they aren't terrible either. In many respects, Q3 results aren't materially different from what we have been seeing in recent quarters. There is not much growth and most companies providing guidance are guiding lower. But there is not much new there; that's what has been on offer on the earnings front for a little over two years now.

The Q3 Scorecard (as of October 24th)

We have seen Q3 results from 208 S&P 500 members that combined account for 54.2% of the index's total market capitalization. Total earnings for these 208 companies are up +4.1% from the same period last year, with 68.3% of the companies beating earnings estimates. Total revenues are up +4.7% and 54.3% have come ahead of top-line estimates.

I's hard to make one all-encompassing narrative for the reporting cycle thus far- it's mixed. Earnings growth is weak relative to other recent quarters, but Q3 revenue growth is tracking better. Earnings beat ratios are about in-line with recent history, though revenue surprises are a bit on the weak side.

The weak earnings growth rate in Q3 was primarily due to some tough comparisons in the Finance sector, particularly with Bank of America. The growth picture would look a lot better when viewed on an ex-Finance basis or ex-BAC basis. But that's no longer the case.

The growth challenge is evident from looking at the two largest sectors – Finance and Technology. Growth rates for both of these sectors are tracking below what we have been seeing from them in other recent quarters.

Few Positive Surprises from Finance Sector

Total earnings for the 41 Finance sector companies that have reported results already (out 80 total in the S&P 500 index) are down -0.3% on +4.8% higher revenues, with a weak 58.5% beating earnings estimates and 51.2% coming ahead of top-line expectations. Please note that these 41 Finance sector companies combined account for 61.6% of the sector's total market capitalization and include all of the major banks and brokers.

This is weak growth and beat ratios in Q3 relative to what we have been seeing from the same group of 41 companies.

The lower ratio of positive surprises for the Finance sector in Q3 thus far is worrisome, though the sub-par earnings growth pace in the quarter is solely due to the huge Bank of America (NYSE:BAC-Free Report) charge. The comparative growth picture improves materially once Bank of America is excluded from the data.

The market's negative response to otherwise decent banking results likely reflects the low interest rate backdrop, which makes the operating environment extremely difficult for the group to navigate. Low interest rates squeeze net interest margins that forces banks to make their earnings numbers primarily through cost cuts. Consensus estimates for the current and coming quarters reflect steady improvement in the 'core' business.

It wouldn't be much of a problem if the current downtrend in yields turns out to be a temporary phenomenon. But if rates remain low for longer or start moving even lower the forward estimates for the sector remain at risk of significant negative revisions. The reason for that is current consensus estimates for the sector reflect a fair amount of improvement in the 'core' banking business, which can only happen if net interest margins start expanding as a result of rising interest rates.

Weak Tech Results

The Tech sector where we have seen results from 70.2% of the sector's market cap has been a relative laggard. Total earnings for the 28 Tech sector companies (out of 65 in the S&P 500 index) are up +4.2% on +8.4% higher revenues, with 67.9% beating EPS estimates and 64.3% coming ahead of top-line estimates. The beat ratios for the sector were tracking below historical levels earlier in the reporting cycle, but have caught on in recent days and now remain largely within historical ranges.

The Composite Picture

The table below shows a composite (or blended) summary picture of Q3 that combines actual results from the 208 S&P 500 members that have reported with estimates for the remaining 292 index members. As you can see, total earnings are expected to be up +4.1% from the same period last year on +2.9% higher revenues and modest margin gains. The expected growth rate for Q3 has been steadily improving in recent days as companies report results and beat estimates.

Total earnings for the S&P 500 reached an all-time quarterly record in 2014 Q2 and current estimates for Q3 put the quarterly total as the second highest ever. But given the historical trend of roughly two-thirds of the companies beating earnings estimates, the final Q3 tally will likely be right in the preceding quarter's record vicinity.

For these estimates to hold, we need an improvement on the guidance front, which has persistently been weak for almost two years now. But we are not seeing that, with a majority of the companies providing guidance guiding lower. As a result, we are starting to see estimates for the current quarter start coming down, which will likely accelerate even more in the coming days.

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Note: For a complete analysis of 2014 Q3 estimates, please check out weekly Earnings Trends report.

Monday-10/27

The September Pending Home Sales numbers will be coming out after the market opens.
Merck (NYSE:MRK-Free Report) will be the notable earnings report in the morning, while Twitter reports after the close today.

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