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No Slowdown Evident in Expected B400 Earnings, Revenue Growth

John A. PrestboJohn A. Prestbo

Amid mounting worries of a slowdown in U.S. corporate earnings growth, our survey of securities analysts’ estimates for the fourth quarter 2018 shows substantial gains over actual results for the comparable quarter in 2017. Once again, the financially strong companies in the Barron’s 400 Index are forecast to outgrow those in the S&P 500 Index, both in per-share earnings and revenue.

Median 4Q 2018 Estimate vs. Median 4Q 2017 Actual
EPS Revenue
Barron’s 400 14.73% 5.84%
S&P 500 11.82% 3.83%

As for slowing growth, the fears seem to be more real in the stock market than they are evident in the historical record. The chart below shows the median per-share earnings estimates versus year-earlier actuals for the Barron’s 400 and S&P 500, as well as the median year-over-year actual results.

b400diaryjan2019

The companies in both indexes outperformed analysts’ forecasts in each of the previous four quarters. In the third quarter of 2018, in fact, expectations were for the S&P 500 to report lower median earnings than a year earlier, while the reality was a gain of more than 20%. If there is any slowdown in this chart, it’s in analysts’ estimates for fourth quarter per-share earnings. The forecasts for the fourth quarter of 2018 are the lowest in a year, yet are at levels that in more ordinary times would be regarded as “healthy” and “substantial.”

Many analysts undoubtedly were caught up in the same slower-growth paranoia that pushed the stock market lower. They trimmed their estimates considerably, and perhaps excessively, particularly in the past couple of months.

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -5.63% -3.26%
S&P 500 -5.24% -0.45%

At the 10-sector level, the Barron’s 400 and S&P 500 are forecast to split per-share earnings leadership half and half—which represents an uptick for the S&P 500. The Barron’s 400 is expected to dominate in the consumer sectors, financials, industrials and utilities. The S&P 500 is predicted to lead in energy, health care, materials, technology and telecommunications; this last is an empty sector in the Barron’s 400. The S&P 500 five-sector leadership is the beneficiary of muted year-earlier actuals, particularly in energy. This situation inflates year-over-year comparisons.

Median 4Q 2018 Estimate vs. Median 4Q 2017 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 15.04% 9.60% 5.38% 3.55%
Consumer Staples 9.85% 5.16% 3.47% 3.00%
Energy 22.71% 77.86% 27.41% 12.25%
Financials 24.21% 13.56% -0.89% 0.79%
Health Care 4.70% 9.79% 7.61% 4.73%
Industrials 25.71% 19.28% 7.76% 5.62%
Materials 3.67% 7.56% 4.02% 4.70%
Technology 7.44% 11.82% 6.19% 4.05%
Telecommunications N.A. 26.48% N.A. 8.71%
Utilities 3.91% -4.84% 3.87% 0.97%

In revenue, the Barron’s 400 is expected to grow more in all but financials, materials and, of course, telecom. The only cloud is in financials, where the Barron’s 400 is predicted to grow less than the year before. Slowdowns in mortgage applications and initial public stock offerings are contributing factors.

In terms of company size by market capitalization, the Barron’s 400 is predicted to outgrow per-share earnings of the S&P 500 in the mega-cap and large-cap segments, which are the only two the indexes share. Mid-caps also are expected to contribute significant growth in earnings for the Barron’s 400, But small- and micro-caps are forecast to move the needle only barely.

Median 4Q 2018 Estimate vs. Median 4Q 2017 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 17.51% 12.80% 6.42% 4.26%
Large Cap ($3 bln-$10 bln) 15.32% 7.57% 5.17% 1.19%
Mid Cap ($1 bln-$3 bln) 14.75% N.A. 5.85% N.A.
Small Cap ($500m-$1 bln) 1.63% N.A. 2.56% N.A.
Micro Cap (< $500 mln) -0.03% N.A. 7.84% N.A.

Margins of greater anticipated revenue growth are narrower than for profits, in part because analysts are more accurate in predicting revenue. Micro-caps and to a lesser extent small caps are expected to continue having trouble converting revenue growth to increased earnings.

In previous quarters, both Barron’s 400 and S&P 500 companies easily beat the forecasts, and there’s no reason they won’t do so again—despite investor fears to the contrary. Time will tell. There is every reason that the financially strong, growth-oriented companies in the Barron’s 400 will continue to set the pace in higher earnings and revenue.

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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