The second quarter earnings season is almost over with 87% of companies reporting. And so far it has been an unmitigated disaster, with only 51% of companies beating on the far easily fudgible bottom line number (which further facilitates the transition of America to a "part-time worker society" as repeatedly demonstrated here), but a stunning 60% of all S&P member missing on the top line. More importantly, for the first time since the Lehman collapse, year-over-year revenue "growth" will be negative, declining at 1% from Q2 2011. Whether the reason is due to FX exposure in a world in which the USD suddenly found a major bid in the past 3 months, or because of corporate unwillingness to reinvest their cash into their business and increase CapEx is unknown. But one thing is certain: absent central bank intervention, which for some inexplicable reason has seen the PE multiple of the S&P rise to 2012 highs, the stock market would not be where it is today if corporate fundamentals had anything to do with actual stock price.
With the conclusion of Week 4, 2Q earnings season is drawing to a close with 405 of the S&P 500 companies (87% of earnings) having reported. Utilities dominated Week 4, with mixed results amid warmer weather but weaker commodity prices. Overall, 51% of companies have beaten on EPS, 38% have beaten on sales, and 25% have beaten on both. This low percentage of beats has stayed generally constant throughout reporting, and is on track to be the worst quarter for positive surprises since 1Q09. For companies that did not beat on EPS, the majority have been in-line, with misses concentrated at the most foreign and European exposed companies. Current bottom-up EPS of $25.66 represents YoY growth of 6%, slightly higher than our forecast of $25.50 and just 0.7% higher than consensus expectations at the start of reporting season.
60% of companies have missed on the top line this quarter amid a stronger dollar, season giveback from 1Q, weak commodity prices and slowing global growth. While some of these headwinds are likely to fade, we could see even more pressure from FX and the European recession in 3Q, as well as slowing demand ahead of the US fiscal cliff. Misses have been widespread, with sales at all ten sectors coming in below expectations. 2Q sales are on track to decline 1% YoY, or come in flat ex. Financials.
First, there is where we stand, and why this week will be a very boring one.
Just 25% of companies have beaten on both EPS and sales this quarter, compared to 41% in 1Q. Telecom has seen the highest proportion of positive surprises, with 50% of companies beating on both metrics, followed by Tech and Health Care.
Revenues are set for their first quarterly and YoY decline:
The market may be broken, but at least it still has the decency to punish "missers", and reward "beaters":
Companies which beat on both EPS and sales have outperformed the S&P 500 by 4.4ppt in the five days following reporting, while those that missed on both underperformed by 3.4ppt. This performance spread has widened over the course of reporting, and compares to average outperformance of 1.4ppt and underperformance of 2.9ppt since 2Q09.
Sadly, there are fewer and fewer beaters to reward:
The three-month earnings revision ratio dropped to 0.6 in July, now well below its long-term average of 0.9.All ten sectors have seen more negative than positive revisions over the last three months, while in July only Telecom and Utilities saw more positive than negative revisions.
The three-month management guidance ratio also declined in July, but at a lesser rate. Companies are now guiding down twice as much as up, with only Staples and Financials seeing more positive than negative guidance over the last three months.