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B400 Forecast to Out-Grow S&P 500 in 3Q Revenue and Profit

John A. PrestboJohn A. Prestbo

Companies have started reporting third-quarter financial results, and so far they have shown mostly impressive growth over year-earlier outcomes. But signs of weakness—predicted declines in year-over-year revenues and per-share earnings—also are in evidence for the first time in this year of a robust U.S. economy.

Fortunately, this caveat does not apply to the financially strong companies in the Barron’s 400 Index. The median anticipated results for the Barron’s 400 once again are pleasingly plump. By contrast, the median forecasts for the S&P 500 companies not only are much weaker but also stand in sharp contrast to the upbeat performance of these companies in the first half of this year. Here is how security analysts expect results to turn out for the third quarter:

Median 3Q 2018 Estimate vs. Median 3Q 2017 Actual
EPS Revenue
Barron’s 400 24.38% 9.51%
S&P 500 -1.29% 5.10%

Securities analysts typically start out optimistic and then reduce their expectations as the quarter in question draws near. Thus far this year, however, they’ve had to raise their forecasts in many instances because of favorable business conditions. Not so for the third quarter, as shown by the direction and subdued magnitude of changes in outlook from six months ago to currently:

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 1.64% 0.00%
S&P 500 -4.59% -1.99%

Predictions aren’t fact, of course, and when all is said and done the third quarter may prove to be yet another period of substantial growth. But if the analysts are right, corporate financial reports may become a source more of disappointment than of surprise.

The Barron’s 400 companies are expected to trounce those in the S&P 500 in every comparable sector. (The Barron’s 400 doesn’t have any telecommunications companies since the September rebalance.)

Median 3Q 2018 Estimate vs. Median 3Q 2017 Actual 
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 18.68% -3.93% 8.13% 4.87%
Consumer Staples 13.31% -5.77% 8.15% 2.55%
Energy 33.91% 7.70% 33.48% 22.60%
Financials 28.79% -0.62% 2.29% 1.12%
Health Care 12.45% -0.36% 7.61% 6.06%
Industrials 29.81% -0.49% 10.29% 7.09%
Materials 31.52% -1.87% 8.43% 5.51%
Technology 15.65% -0.53% 10.51% 6.32%
Telecommunications N.A. 4.55% N.A. 14.24%
Utilities 9.45% -1.17% 7.98% 2.87%

Analysts clearly think S&P 500 companies are having problems converting anticipated revenue growth into predicted per-share earnings gains. The strongest expected growth for the S&P 500 is in the recuperating energy sector and the small telecommunications sector.

The same picture emerges in size segments, as measured by market capitalization. The Barron’s 400 has median predicted growth in double digits, while the S&P 500 is expected to have year-over-year declines in per-share earnings and modest growth in revenues. The two indexes share only two of five size segments.

Median 3Q 2018 Estimate vs. Median 3Q 2017 Actual 
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 22.87% -0.79% 9.36% 5.61%
Large Cap ($3 bln-$10 bln) 27.91% -5.65% 9.91% 1.56%
Mid Cap ($1 bln-$3 bln) 23.51% N.A. 9.38% N.A.
Small Cap ($500m-$1 bln) 18.21% N.A. 6.44% N.A.
Micro Cap (< $500 mln) 27.25% N.A. 14.11% N.A.

We’ll learn over the next six weeks or so just how accurate the analysts are in their forecasts. At that point, we’ll let you know how it all turned out. For now, it appears that the financially fit companies of the Barron’s 400 are poised to deliver solid growth.

John Prestbo, senior advisor to MarketGrader Capital, was formerly editor and executive director of Dow Jones Indexes. He was also chairman of the Dow Jones Index Oversight Committee. During his time at Dow Jones Indexes he worked, along with Barron's and MarketGrader, on the development of the Barron's 400 Index. Prior to that, Mr. Prestbo worked as an editor and writer for The Wall Street Journal in various capacities, including page-one editor, commodity news editor and markets editor. Mr. Prestbo has co-authored or edited several books over the past 30 years. The most recent was "The Market's Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average," published by Dow Jones Indexes in 1999 and "Barron's Guide to Making Investment Decisions" which he helped to compile and edit in 2006. Mr. Prestbo won the University of Missouri Award for Distinguished Business Writing in 1967 and the George M. Loeb Achievement Award for Business Writing in 1968. In 2007, he won the William F. Sharpe Indexing Lifetime Achievement Award. That same year, he was honored for his leadership by Dow Jones Indexes during its celebration of 10 years as a separate business unit.

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