Are Analysts' Revenue Estimates Signaling A Recession?

Tyler Durden's picture

The decoupling between revenues and earnings (that we discussed here) continues and while we have seen analyst reduce estimates, Nic Colas of ConvergEX notes that the estimates for the upcoming quarters of 2012 and into next year have taken a disturbing turn for the worse. On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago.  Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly as companies report their earnings this month.  Also worrisome: analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations.  If this is the best these large, well-capitalized companies can muster in terms of sales growth, can a U.S. recession be far behind?

Nicholas Colas, ConvergEx: Skinny Love - Analyst' Revenue Estimates Signal Recession

We have been tracking what brokerage analysts publish as their revenue estimates for the 30 companies of the Dow Jones Industrial Average for the last three years, with an eye to tracking of how changing market perceptions of macroeconomic conditions alter their expectations for top line growth. As you would expect, revenue estimates for the back half of 2012 have been slowly working their way lower this year.  As the numerous charts and tables after this report show, analysts started off 2012 thinking that Q3 and Q4 would average about 4-6% revenue growth for the Dow companies.  By April, they began to grow a bit concerned, nibbling away at Q3 revenue estimates but leaving Q4 numbers largely unchanged.  In May and June they started to ratchet back expectations more aggressively, to something more like 2-3% for Q3 and 4-5% for the final quarter of the year.


This trend, however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later in 2012 and into 2013.  Some specifics here:

  • For the third quarter of 2012, the analysts that cover the Dow stocks expect to see only 1.0 – 1.5% year-on-year top line growth for the overall index and the non-financial names, respectively.  That will be the worst comparison since the Financial Crisis, and show sequential deceleration/stagnancy from Q2 2012’s expected 3.2% comp overall and 1.5% comparison for the non-financial names.
  • Analysts are still holding out some hope for Q4, but I can tell you from years of experience doing such models that this is probably because they do not want to reduce their full-year earnings estimates just yet.  Right now, Wall Street models show an expected 3.9% year-over-year revenue comparison for the fourth quarter, but I doubt any analyst could defend this point of view unless they expect a rapidly weakening dollar (most of these companies have large overseas operations) or a truly epic round of liquidity-pumping operations from the world’s central banks.
  • What is also notable is that the cuts in expectations over the past 30 days have been widespread.  Analysts are only marginally more bullish on 3 names of the Dow 30 for the back half of the year, and the increases in revenue growth here is miniscule.

The logical question from all this data is simple – why are stocks going up even as analysts cut their financial outlooks?  June and July have been decent months for the broad indices, and this flies in the face of the consistently reduced expectations I note here.  There is, of course, the notion that the sell side is always late to the party and investors factored in a weak back half during the pullback from April to early June.  Fair enough.  What is troubling to me, however, is how close to the edge of an implied global recession we seem to be skating with these most recent estimates.  If inflation is running around 2%, a 1% increase in revenues means a negative 1% growth rate for units sold, assuming constant mix.  That leaves the very real possibility of recession on the table, almost certainly in Europe and quite possibly in the United States.


That leaves expectations for further monetary policy as the last-and-best explanation for the recent rally in U.S. stocks.  When corporations feel the pinch from a slower economy, they lay off workers.  When they lay off workers, the Fed executes on its dual mandate and increases liquidity.  And when the Fed increases liquidity, stocks go up.  Yes, I know it sounds like one of those ads for satellite TV, but this does explain the market’s behavior of late.  And it fits with the data presented here. 

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BaBaBouy's picture

ALREADY HERE, Bitchies ...

Mr. Lucky's picture

Canned food earned a 15% return on investment yoy.

indygo55's picture

My ammo investment has tripled! If you can still get it.

SMG's picture

I personally think this next dip is going to be far worse than 2008.   But since the market is rigged and I'm not on the Oligarch rigging commitee, who knows what the market and stocks will do.

HarryM's picture

The real action starts after the next QE fizzles out

Hype Alert's picture

lol, what isn't signaling a recession?

blueridgeviews's picture

The market's climb ever upwards. Look out below when this balloon pops.

haskelslocal's picture

Have you ever driven up a mountain (of debt/housing) only to drive down the other side?

Dr. Engali's picture

A recession would be a step up from the current depression we are in.

eclectic syncretist's picture

50 years of Fed mayhem being unleashed on the world.  After half a century interest rates are at their lowest point, and it still isn't working.  Have a look at the 10yr treasury bond over the past 50 years^TNX+Interactive#symbol=^tnx;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

You may have to click max timeframe. 

These are crazy times!

Jlmadyson's picture

The dreaded R word! Noooooo! Talking heads will not be pleased. Recession got to be on a major uptrend for google traffic in the last month heh.

Basically yes, the only reason we are here is QE hopeium, which they will never get if they keep this up, and will be far too late to matter when it does hit.

Because we will have fully fallen off the cliff with or without the so called fiscal cliff. The data coming in is terrible.

This fall/winter will be an utter disaster fiscally, financially, and politically.

A recipe for FUN!

haskelslocal's picture

When can we start appreciating lower corporate revenue? Sans growth, in order for a small business to grow, corporations would have to lose business.

When can we stop falling for the fear of a recession? Isn't most of the commentary on ZH regarding the need for a reset to the insanity?


asteroids's picture

I guess all those "green shoots" have now dried up and blown away with the heat.

Yen Cross's picture

 They will just re-adjust the CPi & PPi , and call it a inflation adjusted slowdown as there isn't a hint of inflation in sight!

  Being that everyone is scared shitless, and scurrying around like rats looking for their closest piece of negative yield  CHEEZE!

_ConanTheLibertarian_'s picture

part 2 of the storm. It's all coming together now and it's going to be ugly.

centerline's picture

"signaling that the window dressing is falling off and recognition that there never was a real recovery is setting in..."


There, fixed it.

Jlmadyson's picture

The bottom line is this though:

When does QE, swaps, TARP, bank bailouts, 0% rates, LTRO and all of the rest of the gimmicks central banks have done in the last fours years not matter anymore?

When they realize the gigantic hole can never, ever, possibly be filled, which is fast approaching.

When does QE not matter?

We all shall find out soon enough.

P.S. This so called "one last bullet" is no silver bullet. Just remember this.

LawsofPhysics's picture

They "realized" this in 1971.  Amazing that it continues.

RSloane's picture

I've not read one, not a single one, positive report that didn't depend on obfuscation and fabrication to arrive at a positive conclusion. The shit's that coming out of the white house is complete fantasy. The economy is not moving in the right direction. There is absolutely no reason for hope other than to hope its not as painful as we all think, and know, its going to be.

billwilson's picture

Scary statistic:

Total projected profits for S&P500 companies this year are smaller than this year's federal government deficit.

The only reason they are making money is because the gov is putting money ib people's pockets. Take that away and the profitst would disappear too. (with no revenue cost cutting won't save you)

LawsofPhysics's picture

Technically, since most governments actually coin the money, that is how it has always worked.  The U.S. is unique in that, instead of having it's own treasury coin the money for free. Americans pay a private banking cartel to do it for them.  The Federal Reserve is this entity.  Stupid bloody sheep.

drswhaley's picture

How do analysts collectively get to an above 7% YoY growth when Bush is touting a new book, 4% solution, to get the economy to grow 4% when it is rarely, if ever, accomplished in modern history?

pmm009's picture

The real question is what are the FED's options for QE and how likely?  When will we hit the debt ceiling and will it be prior to November?  Without headroom under the cap, the Treasury cannot sell bonds and the Flow of FUNDs will be altered vs. QE2.  Anyone want to comment on the timing of the ceiling fight, the FED's options in this regard, and how the money supply and funds flows via the primary dealers will be altered, etc.  Seems like a question for Mr. Adler.

disabledvet's picture

Price to sales is a valid measure of equity valuation.

Nobody For President's picture

Just in time for the election!

Long-John-Silver's picture

We have started the next leg down in this Economic Depression. History always repeats (or rimes) and this link shows it happening. 

Link opens in new window so you don't lose your place.

CVfriendship's picture

Oh man, the BROKERS are getting bearish....usually I would say buy!....but this market is living a lie, and epiphanies will eventually equate into mainstream'll hurt, but it'll be healthy.....I hope.


Hype Alert's picture

On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago.

So with a 50%-60% reduction in growth estimates, we still have an increase of almost 5% on the index for the same 60 days.  The market increase is being attributed to the FED and more liquidity, but if that were the case, they wouldn't be dropping the growth estimates, right?  But then, if the conditions don't deteriorate, the FED won't print in which case the reduction in growth estimates are not big enough.  In any case, between the FED, HFTs and the SEC this market is broken.