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September 30, 2018

STOXX 600 18Q3 Earnings Preview – Yearly High Expectations?

by Tajinder Dhillon.

As we roll into 18Q3 earnings season, let’s take a closer look at growth expectations for the STOXX 600.  18Q3 growth projections are poised to deliver the highest growth rates in 2018 thus far, with EPS and Revenue growth coming in at 14.2% and 7.4% respectively.

Exhibit 1 highlights 2018 year-to-date EPS and Revenue growth rates on a quarterly basis which shows the substantial increase in growth expectations this quarter compared to 18Q2.

Exhibit 1: 2018 STOXX 600 Growth Rates

So where is the growth coming from this quarter? If we take a look at which sectors are contributing to the Q3 growth rate, we can see that Energy and Financials are driving the majority of growth expectations.

Exhibit 2 highlights EPS growth at a sector level and we can see Energy is expected to deliver another solid quarter of growth at 44.4% YoY.  Looking at this from a different perspective, Energy is contributing 4.6 points to the overall index growth rate.  This means that the Energy sector is driving 32% (=4.6/14.2) of the STOXX 600 EPS growth rate this quarter.  However, the star sector this quarter is actually Financials, who are expected to grow 25.5% YoY.  Although Financials has a lower growth rate than Energy (25.5% vs. 44.4%), on a share-weighted basis, it is actually contributing 7.3 points to the overall index growth rate.  This means that Financials are actually the main driver this quarter as it is responsible for 51% of the overall STOXX 600 EPS growth rate this quarter (=7.3/14.2).

Exhibit 2: Q3 2018 Earnings Growth Rates by Sector

Now that we know which sectors are driving EPS growth this quarter, which companies should we be paying attention to?  Looking into this further, remarkably, there are 10 companies which account for 81% of the overall index growth rate this quarter (=11.50/14.2).  Exhibit 3 highlights the companies which will be of key importance to investors.

Exhibit 3: Top 10 Contributors to 18Q3 STOXX 600 EPS Growth

Looking at these companies from a StarMine perspective, we are seeing strong scores for Energy stocks.  When looking at our StarMine Combined Alpha Model in Exhibit 3, all Energy companies are scoring in the highest decile (scores above 90) with most of them near 100, the highest score possible.   The Combined Alpha Model provides a single score which is derived from the ‘optimal’ combination of available quantitative models across value, momentum, ownership, and quality.  Unfortunately for Financials, with the exception of Allianz SE, the rest of the companies are not scoring nearly as strong as none of them have a score above 70, which is our threshold for a “bullish” model score.

Furthermore, analysts don’t appear to be bullish on the Financial stocks above, with the exception of Allianz SE.  Looking at our Analyst Revision Model (ARM) which measures analyst sentiment, Banco Santander SA has a score of 17 which is in the 2nd lowest decile.  This indicates that analysts have been busy revising their estimates downwards.   Whether this bearish sentiment will be realized will certainly be interesting to see in the coming weeks which will provide a solid ground into how 18Q3 earnings will play out.

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