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1 EARNINGS INSIGHT John Butters, VP, Sr. Earnings Analyst Media Questions/Requests S&P 500 August 5, 2016 Key Metrics Earnings Scorecard: With 86% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 69% have reported earnings above the mean estimate and 54% have reported sales above the mean estimate. Earnings Growth: For Q2 2016, the blended earnings decline is -3.5%. If the index reports a decline in earnings for Q2, it will mark the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q through Q Earnings Revisions: On June 30, the estimated earnings decline for Q was -5.5%. Seven sectors have higher growth rates today (compared to June 30) due to upside earnings surprises, led by the Information Technology sector. Earnings Guidance: For Q3 2016, 53 companies have issued negative EPS guidance and 26 companies have issued positive EPS guidance. Valuation: The forward 12-month P/E ratio is This P/E ratio is above the 5-year average (14.7) and above the ten-year average (14.3). To receive this report via , please go to: To view other market stories with FactSet content, please go to: All data published in this report is available on FactSet. Please contact media_request@factset.com or FACTSET for more information. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 1

2 Topic of the Week: EARNINGS INSIGHT August 5, 2016 Year-Over-Year Earnings Decline (-0.3%) Projected for S&P 500 for CY 2016 For the first quarter of 2016, the actual, year-over-year earnings decline reported by the S&P 500 was -6.7%. For the second quarter of 2016, the blended (combines actual results for companies that have reported and estimated results for companies yet to report), year-over-year earnings decline for the S&P 500 stands at -3.5%. For the third quarter of 2016, the estimated earnings decline stands at -1.7%. For the fourth quarter of 2016, the estimated earnings growth rate is 5.7%. Given that the index is expected to report earnings declines for the first three quarters of 2016, what are analyst expectations for year-over-year earnings for all of 2016? Do analysts believe earnings will decline for all of 2016 also? The answer is yes. As of today, the estimated earnings decline for the S&P 500 for CY 2016 stands at -0.3%. However, expectations for earnings growth for CY 2016 have been falling not just over the past few weeks, but over the past several months. On December 31, the estimated earnings growth rate for CY 2016 was 5.9%. By March 31, the estimated earnings growth rate had declined to 1.3%. By June 30, the estimated earnings growth rate had decreased to 0.1%. Today, it stands at -0.3%. If the index reports a year-over-year decline in earnings for CY 2016, it will mark the first time the index has reported two consecutive years of earnings declines since CY 2008 (-25.4%) and CY 2009 (-8.0%). At the sector level, four sectors are projected to report a year-over-year decline in earnings for CY 2016, led by the Energy sector (-72.0%). The Energy sector is expected to the largest contributor to the year-over-year earnings decline for the index for the full year. If the Energy sector is excluded, the estimated earnings growth rate for the S&P 500 for CY 2016 would improve to 2.8%. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 2

4 Q Earnings Season: By the Numbers Overview With 86% of the companies in the S&P 500 reporting actual results for Q2 to date, more companies are reporting actual EPS (69%) above estimates compared to the 5-year average (67%), while fewer companies are reporting actual sales (54%) above estimates compared to the 5-year average (55%). In aggregate, companies are reporting earnings that are 4.2% above the estimates. This percentage is equal to the 5-year average (+4.2%). The blended (combines actual results for companies that have reported and estimated results for companies yet to report), year-over-year earnings decline for Q is -3.5%, which is smaller than the expected earnings decline of -5.5% at the end of the quarter (June 30). Four sectors are reporting year-over-year earnings growth, led by the Consumer Discretionary and Telecom Services sectors. Six sectors are reporting a year-over-year decline in earnings, led by the Energy and Materials sectors. In terms of revenues, the S&P 500 is reporting flat sales (0.0%) relative to last year. At the end of the quarter (June 30), the estimated sales decline was -0.8%. Five sectors are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Four sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors. Analysts currently project revenue growth to return in Q and earnings growth to return in Q The forward 12-month P/E ratio is now 17.0, which is above the 5-year and 10-year averages. During the upcoming week, 23 S&P 500 companies (including 1 Dow component) are scheduled to report results for the second quarter. More Companies Beating EPS Estimates But Missing Sales Estimates Percentage of Companies Beating EPS Estimates (69%) is Above 5-Year Average Overall, 86% of the companies in the S&P 500 have reported earnings to date for the second quarter. Of these companies, 69% have reported actual EPS above the mean EPS estimate, 12% have reported actual EPS equal to the mean EPS estimate, and 19% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is below the 1-year (70%) average, but above the 5-year (67%) average. At the sector level, the Health Care (86%) and Information Technology (82%) sectors have the highest percentages of companies reporting earnings above estimates, while the Telecom Services (40%), Utilities (54%), and Materials (56%) sectors have the lowest percentages of companies reporting earnings above estimates. Earnings Surprise Percentage (+4.2%) is Equal to 5-Year Average In aggregate, companies are reporting earnings that are 4.2% above expectations. This surprise percentage is equal to both the 1-year (+4.2%) average and the 5-year (+4.2%) average. The Information Technology (+7.2%), Consumer Discretionary (+6.9%), and Industrials (+6.6%) sectors are reporting the largest upside aggregate differences between actual earnings and estimated earnings, while the Energy (-17.6%) sector is reporting the largest downside aggregate difference between actual earnings and estimated earnings. Market Not Rewarding Earnings Beats and Punishing Earnings Misses To date, the market is rewarding upside earnings surprises less than average and punishing downside earnings surprises more than average. Companies that have reported upside earnings surprises for Q have seen an average price increase of +1.0% two days before the earnings release through two days after the earnings release. This percentage is below the 5- year average price increase of +1.2% during this same window for companies reporting upside earnings surprises. Companies in the index that have reported downside earnings surprises for Q have seen an average price decrease of -2.5% two days before the earnings release through two days after the earnings release. This percentage decrease is larger than the 5-year average price decrease of -2.2% during this same window for companies reporting downside earnings surprises. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 4

5 Percentage of Companies Beating Revenue Estimates (54%) is Below 5-Year Average In terms of revenues, 54% of companies have reported actual sales above estimated sales and 46% have reported actual sales below estimated sales. The percentage of companies reporting sales above estimates is above the 1- year average (49%), but below the 5-year average (55%). At the sector level, the Health Care (80%) sector has the highest percentage of companies reporting revenues above estimates, while the Utilities (8%), Telecom Services (20%), and Consumer Discretionary (33%) sectors have the lowest percentages of companies reporting revenues above estimates. Revenue Surprise Percentage (+0.8%) is Above 5-Year Average In aggregate, companies are reporting sales that are 0.8% above expectations. This surprise percentage is above the 1-year (0.0%) average and above the 5-year (+0.6%) average. The Energy (+1.9%), Consumer Discretionary (+1.9%), and Information Technology (+1.8%) sectors are reporting the largest upside aggregate differences between actual sales and estimated sales, while the Utilities (-7.3%) sector is reporting the largest downside aggregate difference between actual sales and estimated sales. Decrease in Blended Earnings Decline This Week Due to Upside Earnings Surprises Decrease in Blended Earnings Decline This Week Due to Upside Earnings Surprises The blended earnings decline for the second quarter is -3.5% this week, which is smaller than the blended earnings decline of -3.9% last week. Upside earnings surprises reported by companies in multiple sectors were mainly responsible for the decrease in the overall earnings decline for the index during the past week. Information Technology Sectors Has Seen Largest Increase in Earnings since June 30 The blended earnings decline for Q of -3.5% is smaller than the estimated earnings decline of -5.5% at the end of the second quarter (June 30). Seven sectors have recorded an increase in earnings growth since the end of the quarter (June 30) due to upside earnings surprises, led by the Information Technology (to -1.5% from -7.3%) and Consumer Discretionary (to 10.7% from 6.4%) sectors. Three sectors have recorded a decrease in earnings growth during this time due to downside earnings surprises and downward revisions to estimates, led by the Energy (to -82.0% from -78.1%) sector. Earnings Growth: Fifth Consecutive Quarter of Year-Over-Year Earnings Declines (-3.5%) The blended earnings decline for Q is -3.5%. If the index reports a decrease in earnings for the quarter, it will mark the first time the index has seen five consecutive quarters of year-over-year declines in earnings since Q through Q Four sectors are reporting year-over-year growth in earnings, led by the Consumer Discretionary and Telecom Services sectors. Six sectors are reporting a year-over-year decline in earnings, led by the Energy and Materials sectors. Consumer Discretionary: Internet Retail, Home Goods, and Autos Lead Growth The Consumer Discretionary sector is reporting the highest earnings growth at 10.7%. At the industry level, 8 of the 12 industries in this sector are reporting earnings growth for the quarter. Of these 8 industries, 5 are reporting doubledigit earnings growth: Internet & Catalog Retail (86%), Household Durables (32%), Automobiles (24%), Auto Components (16%), and Distributors (15%). Telecom Services: AT&T Led Growth The Telecom Services sector reported the second highest earnings growth at 7.2%. Of the five companies in the sector, AT&T was the largest contributor to earnings growth. The company reported actual EPS of $0.72 (which reflected the combination of AT&T and DIRECTV) for Q2 2016, compared to year-ago EPS of $0.69 (which reflected standalone AT&T) for Q If this company is excluded, the blended earnings growth rate for the Telecom Services sector would fall to -5.7%. Energy: Largest Contributor to Earnings Decline in the S&P 500 The Energy sector is reporting the largest year-over-year decline in earnings (-82.0%) of all ten sectors. Five of the six sub-industries in this sector are reporting a year-over-year decrease in earnings: Oil & Gas Exploration & Production (-657%), Oil & Gas Equipment & Services (-114%), Oil & Gas Drilling (-94%), Integrated Oil & Gas (-59%), and Oil & Gas Refining & Marketing (-47%). The Oil & Gas Storage & Transportation (8%) sub-industry is the only sub-industry in the sector reporting earnings growth for the quarter. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 5

6 This sector is also the largest contributor to the earnings decline for the S&P 500 as a whole. If the Energy sector is excluded, the blended earnings growth rate for the S&P 500 would improve to 0.3% from -3.5%. Materials: Weakness in Chemicals The Materials sector is reporting the second largest year-over-year decline in earnings (-9.2%) of all ten sectors. At the industry level, two of the four industries in the sector are reporting a year-over-year decrease in earnings, led by the Chemicals (-13%) industry. Revenues: Flat Year-Over-Year Revenues (0.0%) The S&P 500 is reporting flat sales (0.0%) relative to last year. If the index reports flat sales for the quarter, it will mark the first time the index has not reported a year-over-year decline in sales since Q (2.0%). Five sectors are reporting year-over-year growth in revenues, led by the Telecom Services and Health Care sectors. Five sectors are reporting a year-over-year decline in revenues, led by the Energy and Materials sectors. Telecom Services: AT&T Led Growth The Telecom Services sector reported the highest revenue growth of all ten sectors at 9.6%. At the company level, AT&T was the largest contributor to revenue growth for the sector. The company reported actual sales of $40.5 billion (which reflected the combination of AT&T and DIRECTV), compared to year-ago sales (which reflected standalone AT&T) of $33.0 billion for Q If AT&T is excluded, the blended revenue growth rate for the sector would fall to -1.2%. Health Care: Broad-Based Growth The Health Care sector is reporting the second highest revenue growth of all ten sectors at 9.0%. All six industries in this sector are reporting sales growth for the quarter, led by the Health Care Providers & Services (11%) industry. Energy: Largest Detractor to Revenue Growth in the S&P 500 The Energy sector is reporting the largest year-over-year decrease in sales (-24.6%) for the quarter. All six subindustries in the sector are reporting a year-over-year decrease in revenues: Oil & Gas Drilling (-47%), Oil & Gas Equipment & Services (-34%), Oil & Gas Exploration & Production (-27%), Integrated Oil & Gas (-24%), Oil & Gas Refining & Marketing (-23%), and Oil & Gas Storage & Transportation (-5%). This sector is also the largest detractor to sales growth for the S&P 500 as a whole. If the Energy sector is excluded, the blended revenue growth rate for the S&P 500 would improve to 2.7% from 0.0%. Materials: Weakness in Chemicals and Metals & Mining The Materials (-7.3%) sector is reporting the second largest year-over-year decrease in revenues of all ten sectors. Two of the four industries in this sector are reporting a year-over-year decline in sales for the quarter: Chemicals (-10%) and Metals & Mining (-9%). FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 6

7 Looking Ahead: Forward Estimates and Valuation Earnings Growth Not Expected to Return Until Q For Q2 2016, S&P 500 companies are reporting a year-over-year decline in earnings (-3.5%), while reporting flat revenues (0.0%) relative to last year. Analysts currently expect revenue growth to return in Q and earnings growth to return in Q In terms of earnings, the estimated growth rates for Q and Q are -1.7% and 5.7%. In terms of revenues, the estimated growth rates for Q and Q are 2.2% and 4.9%. For all of 2016, analysts are projecting earnings to decline year-over-year (-0.3%) and revenues to increase yearover-year (+1.8%). Please see page 2 for more details on the earnings decline for CY Guidance: Negative EPS Guidance (67%) for Q3 Below Average to Date At this point in time, 79 companies in the index have issued EPS guidance for Q Of these 79 companies, 53 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 67% (53 out of 79), which is below the 5-year average of 74%. Valuation: Forward P/E Ratio is 17.0, above the 10-Year Average (14.3) The forward 12-month P/E ratio is The P/E ratio of 17.0 is above the 5-year average forward 12-month P/E ratio of 14.7, and above the 10-year average forward 12-month P/E ratio of It is also above the forward 12-month P/E ratio of 16.6 recorded at the start of the third quarter (June 30). Since the start of the third quarter, the price of the index has increased by 3.1%, while the forward 12-month EPS estimate has increased by 0.9%. At the sector level, the Energy (65.9) sector has the highest forward 12-month P/E ratio, while the Financials (13.0) sector has the lowest forward 12-month P/E ratio. Nine of the ten sectors have forward 12-month P/E ratios that are above their 10-year averages, led by the Energy (65.9 vs. 16.4) sector. The Telecom Services (14.4) is the only sector with a forward 12-month P/E ratio below its 10-year average (14.6). Companies Reporting Next Week: 23 During the upcoming week, 23 S&P 500 companies (including 1 Dow component) are scheduled to report results for the second quarter. FactSet.com Copyright 2016 FactSet Research Systems Inc. All rights reserved. 7

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