S&P 500 EPS is forecast by consensus to decline 2% both sequentially and YoY in 3Q12 driven by net margin compression. As Morgan Stanley's Adam Parker notes, it appears (for now) that we can have an earnings recession without an economic recession; but the disconnect may be a lag as opposed to a decouple. Roughly 50% of companies are expected to experience YoY contraction in net margins but - and this is the 'funny' segment of this post - consensus expects an 18.2% incremental margin expansion in 2013 (from a 7.2% rise in 2012 which is down from 13.1% rise in 2011); and while 3Q EPS is expected to be negative, the following three quarters EPS growth are expected to rise dramatically (double that of 2012 on average). It seems investors (and analysts) are still willing to believe in miracles.
This is one of Morgan Stanley's chief concerns. Currently, the consensus embeds very optimistic 2013 incremental margin expectations, accelerating at a time when a potential fiscal cliff is imminent and profit margins are already at record levels.
We doubt that companies can drop through 18 cents for every dollar they grow revenue in 2013.
Remember, earnings are declining for the entire S&P500 right now!
but are expected rise dramatically in the quarters to come - again by some miracle - even after 3Q2012 EPS has been reduced notably already - with 4Q12 EPS dropping to wher 3Q12 was 7 months ago...
Priced In? Only if you think Fed-driven multiple-expansion is the 'alter-ego' of reality...
Charts: Morgan Stanley