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Analysts Try To Predict Future Earnings, Comedy Ensues
While everyone's attention is focused on the earnings deluge set to be unleashed in the third quarter (and if the handful of companies reporting so far is any indication, this may be one of those quarters when companies underperform already drastically lowered EPS estimates, which at last check are set to tumble -5.5% Y/Y according to consensus), the big surprise is what has quietly taken place to Q4 consensus estimates.
First, a reminder of where Q3 stands from FactSet.
At the start of the peak weeks of the Q3 2015 earnings season, the blended earnings decline for the third quarter stands at -5.5%. Factoring in the average improvement in earnings growth during a typical earnings season due to upside earnings surprises (see page 2 for more details), it still appears likely the S&P 500 will report a year-over-year decline in earnings for the third quarter. If the index does report a year-over-year decline in earnings for the third quarter, it will mark the first time the index has reported two consecutive quarters of year-over-year declines in earnings since Q2 2009 and Q3 2009.
Actually, make that three quarters in a row, because as of this past week, EPS in the fourth quarter, which on June 30 were triumphantly expected to post a solid 4.3% rebound, went from +0.2% to negative 0.4%.
Looking at the current quarter (Q4 2015), what are analyst expectations for year-over-year earnings? Do analysts believe earnings will decline in the fourth quarter also? The answer is yes. This past week marked a change in the aggregate expectations of analysts from flat year-over-year earnings (0%) for Q4 2015 to a decline in year-over-year earnings for Q4 2015. However, expectations for earnings growth for Q4 2015 have been falling not only over the past few weeks, but also over the past few months. On June 30, the estimated earnings growth rate for Q4 2015 was 4.3%. By September 30, the estimated growth rate had declined to 0.2%. Today, it stands at -0.4%.
The following chart shows the trajectory of Q4 consensus EPS growth, or rather as of October 9 when it just turned negative, decline:
This is nothing more than the well-documented sellside overoptimism, aka the spread between the "soft dollars" optimism (because banks are only paid for their optimism never for their skepticism), and reality. It is also shown in the "fishhook" chart below from Deutsche Bank.
This is turn takes us back to a post we did three weeks ago, in which we laid out the truth about S&P earnings which few have dared to mention, namely that there is now "no earnings growth for 7 quarters (with a revenue recession on top)"
It is time to revise this chart because as a result of the decline in both Q4 2015 and inevitable drop in Q1 2016 EPS, we are on the verge of having not seven but eight quarters, or two straight years without an increase in S&P earnings - something that has never happened outside of a recession!
So what is the good news? Well, in order to save their optimistic year-end price targets if not so much for 2015 then for 2016, analysts have to predict what EPS will be in the 4 quarters of 2016.
This is what FactSet says: "it is interesting to note that analysts in aggregate do expect earnings growth to return for all
quarters in 2016. Please see the chart on page 5 for more details."
That's right, after two years of stagnant earnings, and three straight quarters of declining quarterly EPS, the sellside community now expects a dramatic surge in 2016 EPS, which after rising 4.9% and 7% in Q1 and Q2, is expected to literally soar in Q3 and Q4 by 14.7% and 14.1%
Behold:
While we appreciate Factset's wry (or dry) humor, we would replace "interesting" in the bolded sentence above with "absolutely comic", because as DB further notes, the only way earnings soar as much as they do in 2016 is for the energy sector to do a full U-turn, which in turn will only happen if oil manages to storm higher from its current price in the mid-$40s to a price double that, somewhere north of $80.
Then again, if and when all central banks engage in the final act of monetary desperation - a necessary and sufficient condition for a commodity price supernova - it is quite possible that oil will in fact rise to $80, maybe even $800. However, for anyone using an "all else equal" approach to forecasting, we would suggest that expecting a 14% annual increase in earnings in the second half of 2015 is just not going to happen. In fact, just the opposite is likely to happen considering the biggest, and long overdue, GDP-crushing inventory liquidation/repricing in US history looming just around the corner.
Source: Factset
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I would rather click on "Here's what happens to a bikini on the biggest water slide in Texas"!!
I might have to undo Adblock plus. I would have figured that the MH17 story would be posted by now. Oh well. I guess most people are here for charts.
pods
Why does it seem that so many people WILLINGLY put on blinders and then spout off obvious lies and misdirection based on their blinded viewpoint? I don't get it. Why aren't truth and reality where everyone operates? It is so much dang easier and smoother to deal with in the long run (maybe not in the short run though, and therein may be the answer).
1. Nothing is anyone's "fault" and no one has to accept the consequences for their bad decisions. Hence all decision making is inherently flawed because there are no real consequences. "At this point what difference does it make?"
2. Instant gratification is a right.
3. Truth is "oppressive".
Exactly so. This is what I wrote on another ZH article about Most Indicators Have Lost Their Informational Value, and I think it applies here too:
"We doubt that the alternative of CBs abandoning desire to regulate and ‘smooth cycles” and letting deflationary business cycle to reset itself is on the cards."
Perfect. That explains "hubris". Instead of being there to smooth out cycles, they are there to play the superhero who comes in and rescues the failing minions. Their job is not to rescue anything, it's to even out the bumps. But when the pathway is leading to recession because of stupid business and political decisions that were made, you MUST let those who made the decision suffer for their stupidity, otherwise they don't learn anything from it. This whole TBTF nonsense is what causes cycles to be way deeper and longer than they should be. So we keep the idiots in power and control of the system by enabling them with more and more fiat to play with. Great plan. I'm sure it will work out just fine.
Why does it seem that so many people WILLINGLY put on blinders…
Depression IS all loss of hope. This is why good liars are so damned valuable! Yes, we CAN!
Depression can be cured by a good high level white collar perp walk.
why? is somehthing amiss??....everything is just fine the oracles have spoken, my money is on the Cubbies..
… are you related to Norm L.C. Bias, of Chicago?
Once again reality rears its ugly head and forward guidance is "may you live in interesting times". I expect Gartman to come on CNBC and declare he's all-time bullish.
Gartman will be shot on live TV by some angry Joe who lost his life savings within two days of option-"trading" following Gartmans "advice"
R U ready for another year of rangebound markets?
http://goldenopportunitytrading.blogspot.com
With the Fed sticking it's hands in and controlling the market it doesn't seem to matter.
It's become a financial fantasy land with skittle pooping unicorns.
Why is there such a low traffic on ZH today?
So much Flash advertising crashing everyone's computer.
Ad Block plus
Because of stories like these.
a ZH'er can only go so long wonder when it's all gonna end...fear porn burnout
So true. Even "chart-porn star" needs a break some time.
Because everybody is reading the 14 months in the waiting Dutch Safety Board's report on the downing of MH17.
SO ONLY KIEV KNEW WHICH OF THE 160 PLANES WAS MH17.
Did the Dutch miscreants investigate why the other other 159 planes were not shot down? Were they not as easily mistaken for Ukraine army transports? Why did it take 14 months of secret investigation to tell us that Kiev should not have routed planes over the combat zone?
Was it to get a year of free propaganda?
How do you say "False Flag" in Dutch?
Breathlessly waiting for the Big Debate
Would have also accepted "hilarity ensues".
So that's it then. The BoJ is going to monetize it's next round of Qe with CL[oil] futures to drive their inflation target. lol
You just had to jinx us.
Lets Play....name the Central Bank to print those profits. Maybe I will write a book called Carry Trade You Ways Riches....or did Yellen already write it?
The average daily mean annual temperature in Chicago (Obama's current home town?) is 51.3 degrees fahrenheit. Based on the seasonal adjustments there is never any freezing weather in Chcago. Humid weather in July is simply adjusted down.
The strong dollar is a bitch for earnings.
Typo--it should have read 2016 in:
"we would suggest that expecting a 14% annual increase in earnings in the second half of 2015 is just not going to happen."