And Now Back To Reality And The Impossible Earnings Season Stepfunction

Tyler Durden's picture

Last week the S&P erased 6 days of consecutive losses in 30 minutes of trading on the back of news that JPMorgan lost at least 25% of its average annual Net Income in one epic trade, and stands to make far fewer profits in the future, even as the regulators are about to fire a whole lot of traders for mismarking hundreds of billions in CDS. This was somehow considered "good news." This being the "new normal" market, where nothing makes sense, and where EUR repatriation as a result of wholesale asset sales by European banks drives stocks higher, we were not too surprised. Sadly, even in the new normal, things eventually have to get back to normal. And that normal will come as corporate earnings are disclosed over not so much over the next 3 weeks, when 77% of the companies in the S&P report Q2 results, but in the 3rd quarter. Why the third quarter? Simple: as Goldman's David Kostin explains, "consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q." Sorry, but this is not going to happen, and as more and more companies preannounce on the back of the global slowdown which many has seeing US GDP down to 1.3% in Q2, and sliding further in Q3 absent some massive QE program out of the Fed, it is virtually guaranteed that the unchanged Earnings precedent that Q2 will set (and there is a very high probability that Q2 2012 will mark the first YoY drop in earnings since the unwind Great Financial Crisis) will continue into Q3 and likely Q4. Because, sadly there simply is no catalyst that will drive revenues higher, even as margin contraction was already set in.

All of this also means that the only possible driver of S&P growth in Q3 (of which we are already 2 weeks deep into) and Q4 will be multiple expansion. This, however too, will be a disappointment. Again from Kostin:

We believe P/E multiple expansion is unlikely in 2H. Headwinds include the fast-approaching Presidential election, associated policy uncertainty, and the looming “fiscal cliff” that everyone outside the beltway decries but no one in Washington, DC seems willing to seriously address.

Not to mention the debt ceiling which is still on track from making US landfall sometime in the next 3 months.

So while short covering rallies are fast and furious, corporations -that traditional deus ex to justify US "decoupling" - now have only one fate before them: disappointment.

Which leaves the Fed. Sadly, not even the extension of Twist can do anything about the biggest concern that banks are currently facing, namely the accelerated decline in reserves, as a result of the prepayment of Maiden Lane obligations and the gradual drop in FX swaps (at least until the next time Europe needs a Fed-based bail out that is). As can be seen in the chart below, Adjusted Reserves have tumbled to level not seen since December, and then May of 2011, both times when the market was about to turn over if not for global coordinated central bank intervention.

Full note from Goldman:

Our 2012 investment thesis for the US equity market has three pillars: a stagnating economy, static P/E multiple, and minimal earnings growth.

First, weak macro data and three proprietary Goldman Sachs indictors support our view of a lackluster economy. The Goldman Sachs Current Activity Indicator (CAI) shows the US economy growing at an annualized pace of just 1.3%. The three-month moving average of our Earnings Revision Leading Indicator (ERLI) diffusion index, a measure of 29 separate micro-driven industry data points, remains below trend at 41, consistent with a softening of our Global Leading Indicator (GLI). On the macro front, the June ISM report slipped to 49.7, the first sub-50 print in three years.

Second, we believe P/E multiple expansion is unlikely in 2H. Headwinds include the fast-approaching Presidential election, associated policy uncertainty, and the looming “fiscal cliff” that everyone outside the beltway decries but no one in Washington, DC seems willing to seriously address.

The third leg of our three part framework will come into clarity during the next several weeks as firms report 2Q results and offer guidance on business activity for the second-half of 2012. 80% of S&P 500 market cap will report between July 16th and August 3rd. Firms to watch next week include: BAC, C, GE, IBM, JNJ, KO, MSFT, PM, SLB, and VZ.

We expect a modest quarterly earnings miss. A shortfall in sales rather than margins will be the primary culprit. Firms will struggle to meet revenue forecasts given weak global demand and a strong US Dollar. Consensus margin expectations are already flat or negative in most sectors.

Bottom-up consensus currently forecasts flat year/year EPS growth, driven by a 4% increase in sales and a 40 bp fall in margins to 8.9%.

Five sectors are expected to post negative earnings growth in 2Q 2012 compared with 2Q 2011: Energy, Materials, Utilities, Consumer Discretionary and Consumer Staples. Analysts forecast Materials and Energy will both post year/year EPS declines of 12% reflecting the sharp fall in commodity prices during 2Q, with Brent plunging by 16% and copper dropping by 10%. In contrast, Industrials and Information Technology will report EPS growth of 7% and 11%, respectively. Apple (AAPL) will again be a standout performer with year/year sales and EPS growth of 32% and stable margins of 25.6%. Including AAPL, the Tech sector is forecast to deliver sales and EPS growth of 9% and 11%, respectively. Without AAPL, the sector will post revenue and EPS growth of 6% and 7%, respectively.

2Q results will affect the market’s outlook for earnings in 2012 and 2013. Consensus now expects year/year EPS growth to accelerate from 0% in 2Q, to 3% in 3Q to 17% in 4Q. Consensus forecasts full-year EPS growth will double from 7% in 2012 to 14% in 2013. In contrast, we do not forecast a steep 4Q 2012 inflection and anticipate EPS growth climbing from 3% in 2012 to 7% in 2013.

Our full-year 2012 and 2013 S&P 500 EPS forecasts remain $100 and $106. Current bottom-up consensus equals $103 and $117. Consensus 2012 estimate has dropped from $107 in January and from $114 in August 2011.

Earnings season focus points: (1) domestic demand; (2) international weakness; (3) margins; and (4) losses from JP Morgan’s CIO unit.

Our ERLI Diffusion Index suggests US micro data improved in June but the three-month moving average remains below trend at 41. In May, our diffusion index of micro driven, industry-level data points fell to 29, the lowest reading since April 2009 (a reading of 50 implies “trend” growth). However, data rebounded in June producing a slightly above trend reading of 53, with 23 of 29 industry variables increasing at a trend or better pace. Examples include hotel occupancy, rail car loadings, and NY/NJ port activity. If this trend persists, it implies that the micro data points which inform equity analysts’ earnings projections may not be as poor on a near-term basis as an otherwise gloomy macro picture suggests. In contrast, our macro driven Global Leading Indicator of industrial production has been contracting at an accelerating rate for the last three months, which our research has shown augurs poorly for S&P 500 returns.

Margins will once again be source of scrutiny. Margins have stabilized at 8.9% for more than a year after having surged by 300 bp from a cyclical low of 5.9% in 2009. Differing margin forecasts explain 80% of the gap between our top-down EPS estimate and bottom-up consensus for 2012. Consensus expects margins to remain flat during the first three quarters of 2012 before rising sharply starting in 4Q and expanding to 10% by year end 2013. In contrast, we forecast margins will hover around 8.9% for the next two years.

JP Morgan CIO trading losses. This morning JPM reported 2Q EPS of $1.21, 59% above consensus expectations of $0.76. Of course, analysts had cut estimates by 38% since May after the bank disclosed large trading losses in its chief investment office. The JPM CIO losses of $4.4bn reduce 2Q 2012 EPS for the S&P 500 by $0.49. For the Financials sector, year/year EPS growth in 2Q is anticipated to be 8% including JPM and 12% without.

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Seasmoke's picture

Iceberg Ahead !!!!!!!!

Muppet of the Universe's picture

In a world of fractals... things don't repeat, they rhyme.  Here's comes the 2011 rhyme all over again.

Yen Cross's picture

 lack of " Earnings season"/             Road kill season/ on guidance that 50% of q-1 estimates!   I can hear the crickets chirping, Mr. Krugman!

knukles's picture

Paul would be telling us that America is doing very well, thank you very much, and that had it not been for the Fed's ease and budget deficits which should never ever go above 50% (of what we are yet to be informed or enlightened by the little Unicorn that could) and it would otherwise have been or would be one hell of a lot better if there was even more monetary stimulus and fiscal spending accompanied by higher taxes, income redistribution and whatever else he conjures up at the moment.
And.... mind you with respect to earnings, them fellows at Goldman are robbers but who would question their integrity and knowledge so that equities should skyrocket reflecting that the Goober-mint Will Take Over The Economy just as professed and projected by the French Socialists who are just like American Dumocraps except that Democrats don't tax, they invest.
So there.
Guidance is that the Goober-mint should be bigger.


What has Paul Krugman to do with Goldman's guidance?
Fuck Goldman, Goldman's guidance and Paul Krugman

GernB's picture

Krugman currently claims the stimulous was too small, despite his prediction it needed to be 600 billion and we passed a 787 billion package months later.

He has also claims we need more stimulous, despite an increase of over 2 trillion in US outlays over 2007 levels. Apparently 2 trillion isnt enough stimulous.

He claims austerity doesnt work, despite the fact you cant find a single substantial decrease in total outlays for any of the countries he cites as examples austerity does not work. Apparently passing an austere budget counts as austerity, not actual spending decreases.

And he uses the US as an argument against those who say temporary spending tends to become permanent, totally ignorant of the fact US outlays jumped the year of the 2009 stimulous and remain only 100 billion off those levels till today.

The Monkey's picture

It's obviously time to QE and ramp the markets. Higher prices and a weaker dollar = greater profits and incentives to ramp up even more production. Everybody wins.

The only risk is not being fully invested.

monopoly's picture

And where would our GDP be if we had free markets and this "brilliant" Administration and the Fed did not add 4 trillion dollars to our debt load? We will never know as our freedoms and the truth are slowly dissolving into the abyss.

John Law Lives's picture

If the Chairsatan reads this analysis, he might starting hitting CNTRL - P with full gusto right away...

derek_vineyard's picture

the average joe is in a deep recession while corporate earnings rocketed, so if they go flat to negative does that mean common man gets a depression to subsidize lavish top 1/10th% lifestyles?

corporations did great during this recession, so it appears the entire system must crumble to take them down, so then nothing is safe then

so beat em or join em i'm sorry to say

kinda like penn state football are corporations.....anything and everything goes to maintain power  (wonder whats going on at notre dame or florida or others)

GernB's picture

Most corporations are just trying to deal with a situation not of thier making where government is doing all it can to make it harder for them to predict the future and serve customers. Many would like to hire more and expand but unpredictable intervention in free markets and a burden associated with hiring that is also not of thier making, makes that difficult.

You are essentially wanting to punish all corporations for the actions of a few, and them protecting themselves and their employees and customers from the actions of an out of control system.

Caviar Emptor's picture

WE're in biflationary spiral mode again with prices for necessities and raw materials rising on a steeper slope (and core  PPI up 2.6% yoy) while paramters that drive earnings slumping at a faster clip: export prices (and port loadings), rail car loadings, consumer confidence, full-time employment, China with weakest growth in 3 years, House GOP proposing $16.5 Billion cuts to SNAP program (and Euro austerity), key order trends in Asia dropping (Cummins reports slumping truck engines and power generating equip orders), slowing Brazil and emerging market exports and imports. Etc. And everywhere central banks are easing and cranking out more stim. That will only stoke the fire. Again. 

derek_vineyard's picture

japan circa 1989 to present (without the stock market crash)

Yen Cross's picture

 Spot on! Japan the never ending, 240 % gdp story!

I am Jobe's picture

Better than expected.

Mae Kadoodie's picture

Kostin Muppets some money.

BeetleBailey's picture

Hopium and Bullshit - a toxic mix of uber ka ka and a dash of news of the weird to get the sheeples minds off the REALLY bad news: it's a fucking tragedy out there for the common man - whilst the fucking douchebag politicians go around blaming each other and polishing up their bullshit shoes for another round of "elect me - I'm cool".





Yen Cross's picture

 Nice post! I was thinking " Hogans Heros"?

Yen Cross's picture

 man i love that spx " earnings growth" and "ism" chart match up!

Rainman's picture

By God, they will downward adjust our perceptions of prosperity.....realign all notions of success. That is the future. 

BlueStreet's picture

Market makes about as much sense as CNBC pasting the Maria and Spitzer promo on the top of their page for the past 24 hours when he clearly mopped the floor with her.  Pretty fitting since she's turned into a bit of a rag.  Long gone are the 'money honey' days.  

Yen Cross's picture

 BlueStreet  = win /win ! Nice post!      Maria Barfaromo, is not My last choice.      " YUK"

  That Mandy , pole dancer ( perma douche bag) , needs to go back to OZ!

surf0766's picture

Spitzer... who is he on any show...

q99x2's picture

The FED prints 100 Bn per month to compensate for the 2006 era Banking Fraud. Fraud that can no longer drive the economy.

Repudiate the debt. Pay the citizens directly with the additional 100Bn and let's party like no tomorrow.

Better do something for the people quick with the way this years grain production is headed.

Snakeeyes's picture

Stagnating economy? But the housing market bust is over(or so says Sam Chandan at Wharton)

RobotTrader's picture

I'm laughing.


Its going to be the same scam as they pulled last year and the year before:

"Less Bad"

"Already Priced In"

"Beat By A Penny"

"Ex Non-Recurring Items"

"Waiting for 2nd Half V-Shaped Recovery"

Then after Bernanke fires his Paul Krugman Bazooka and upside momentum is clearly established, then he's gonna start flapping about

"Green Shoots"

Did I miss anything?



Yen Cross's picture

 No really! I'm laughing,<

The trend is your friend's picture

you missed "muddle through".  wtf is muddle through anyway

disabledvet's picture

it like the fishing lure called "The Muddler Minnow." Guaranteed to catch 'em every time.

bankrun's picture

War in Q4.
What is it good for?
S&P 500 YoY quarterly earnings growth forecasts apparently...

I should be working's picture

Yeah, probably means the stock market will look like a step function too.  Gapping in the opposite direction of course.

worbsid's picture

We live in Nevada.  Unemployment would be worse but the 99ers moved to someplace else or got disabled. 

There are lots of short sales.  Underwater houseing numbers in our area is improving because of all the forclosures, short sales, etc. still a lot of houses on the market and realtors are crying blues. 

There were a lot of store front closing of small businesses a while back but ... we went to the Outback last night and the place was packed.  The steakhouse at the local casinos are reservations only on the week ends.  The coffe shops are packed.  The Starbucks count is still high and lines at the drive throughs. The outward indications here of some sort of badness is not visable. 

Most of the people I know are retired and nothing too bad has happened.  They know that "Medicare is Life" for them and Obamacare is not an issue. It is more of a wait and see thing.

All up life is good and there is nothing on the horizon that looks too bad.  I don't watch much TV but I miss Flip, Emogene, Milton, and others.  It seems faked reality TV has taken over.  

No, I am not a fool.  The garden is doing well, the solar pump in our well provides all the water we will ever need, the solar powered golf cart with inverter can power my wood shop. The mattress is stuffed and the PMs are buried. A Carrington Event would be a 'jolt' and it looks like we might have some interesting times ahead.  Interesting times, hey what?  We wanted interesting times and now we are living them.          

Doublescythe's picture

Apple bitchez! iPhone launch in Q3 bucks the earnings collapse :)

GMadScientist's picture

Might save a few hedgehogs from imminent annihilation for the nonce.

dcb's picture

if you havea goodcharting program, and really want to see how fucked up the system is. (remember the vast majority of buying isn't even held over night now, but for something like 88 seconds. algo hell and really shows once more how screwed ourcapitial markets are.

chart uyg. draw a line (weekly) draw a lind connecting last weeks low with this weeks low, than draw a paralell line connecting last weeks high down) i get about 55.90 for this weeks top (where you would close your short of doing a computer), notice it goes a slight bit above this, so when I see the aglo's rampup like this it seems to me that they are making sure to trigger buy orders and little more. it will of course be interesting to see monday.

I will state depending on how you chart you can have different alternatives.

Bansters-in-my- feces's picture

The "new normal" makes my head hurt.!

mind_imminst's picture

The "new normal" is high unemployment and persistent negative traditional aggregate statistics of "economic health" vs. corporate health. Sure, the system is immoral and f'd up and the FED/gov are propping up some miserable should-be-bankrupt businesses, but not all corps are total arms of the system. Technological progress and automation continue to help corpoarations do more with less. Each and every single day that passes we see more product produced with less labor. I think many Zero-hedgers forget about that. That is at least one reason why US equities markets have not shown more downside (given the macro environment). US corps are some of the most efficient on the planet. Even in a declining macro environment they continue to find ways to turn a profit (in aggregate).

I still think government expenditures and shadow markets are too big and will cause further pain in the future, but don't be surprised if corporations, especially the ones not tied too closely to the gov, continue to eeek out a profit in these tough times.

GMadScientist's picture

"...three proprietary Goldman Sachs indicators..."

Bollinger, Bitches, and Blow?