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Earnings Season Preview: +9.7% 2012 EPS Growth Still Too High

Tyler Durden's picture


By now, it seems clear that the US earnings season will be softer than was forecast a couple of months ago. In fact, there was more negative guidance during the second quarter than any time in this cycle and Morgan Stanley, like us, believes these soft results and weaker guidance are not fully discounted into a QE-hungry market. Lower oil, a stronger dollar (e.g. a one-standard deviation appreciation in the US Dollar against a basket of currencies decreases expected S&P 500 earnings by 2.6%), lower 10-year yields and a preponderance of evidence of lighter growth from economically sensitive companies are reasons for a lower view of Q2 EPS than we previously expected as UBS notes the 'official' US Q2 reporting season kicks off in earnest today with Alcoa followed by over 3,000 global companies reporting in the next two months. At the sector and stock level UBS sees particular risk around some of the higher rated areas such as consumer staples and consumer discretionary, where relative multiples are high and expectations are demanding and while they see consensus estimates for 2012 global EPS growth have been falling - at 9.7%, they remain too high given the Eurozone crisis / policy response; deteriorating global macro data; and the corporate profit cycle - and in that order of importance.



UBS - And Now For Something Completely Different

Global equity markets have had other things on their mind: Greek elections (two), Spanish bank re-capitalisation plans (many), EU emergency summits (c.20 since October 2009) and weaker macro data. We believe Global equity markets are currently being driven by three factors: 1) the Eurozone crisis / policy response, 2) deteriorating global macro data and, 3) the corporate profit cycle. And in that order of importance.


Nevertheless, this will be the first opportunity to hear direct from corporates about the impact of the broader macro slowdown on profitability. There will likely be a contrast with Q1. For example, in Europe the Q1 reporting season was actually the best for 4 quarters in terms of net beats. But that was at a time when European GDP growth was flat - our economists expect it contract -0.3% quarter on quarter in Q2. Additionally PMIs are averaging at lower levels in Q2 (chart 2).


Admittedly, consensus estimates for 2012 global EPS growth have been falling. But they still stand at 9.7% - a level we continue to believe is too high.


In particular, we remain concerned over margin risk as the profit cycle matures. In the vast bulk of the developed markets, margins are just coming off 30-year highs (although this is not the case in Asia).


At the sector and stock level we see particular risk around some of the higher rated areas such as consumer staples and consumer discretionary, where relative multiples are high and expectations are demanding. Disappointments in these areas will likely earn a sharper multiple de-rating along with any earnings downgrade. Globally, the top 5 sectors where current P/BV look most stretched relative to history are all consumer-based: tobacco, beverages, media, consumer services and retail.


We have tracked c.60 profit warnings from major companies across the globe. Unsurprisingly the most warnings have come in Europe. At a sector level, consumer discretionary, industrials and materials have provided the bulk of the warnings, with consumer staples having the most warnings of the defensives.


So, it will be intriguing to see what message we hear from companies over the next few weeks and there is clear risk for highly rated stocks that miss. But ultimately we suspect focus will switch back to the Euro zone, policy response and any indications from macro data as to whether a second half recovery is likely or not.


Peak weeks for Global companies reporting will be the second-half of July with over 1,200 companies reporting.

Most profit warnings have been concentrated in consumer discretionary, industrials and materials. In the defensives, the bulk of the warnings have come from the consumer staples.

Reasons given for profit warnings are sometimes hard to pin down – but we have divided the warnings so far into 5 general buckets below. As mentioned above, we continue to see the medium-term threat to earnings coming more from margins than top-line risks.

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Mon, 07/09/2012 - 15:44 | 2599660 zero19451945
zero19451945's picture

Earnings are totally irrelevant. I don't even bother reading them.

For the most part, a company's stock will continue to go up as long as it isn't on the verge of total failure due to the positive correlation present in the entire market.

Mon, 07/09/2012 - 15:49 | 2599682 devo
devo's picture

I want the last three seconds of my life back.

Mon, 07/09/2012 - 15:50 | 2599691 zero19451945
zero19451945's picture

You can argue all you want but you'll have a hard time refuting what I said.

ZIRP, HFT, and positive correlations make earnings not all that relevant.

Mon, 07/09/2012 - 15:56 | 2599721 notbot
notbot's picture

Didn't they miss the all-important "Weather" category?

Mon, 07/09/2012 - 16:07 | 2599767 5880
5880's picture

Earnings are an elephant?

Mon, 07/09/2012 - 16:09 | 2599769 devo
devo's picture

Two words: diminishing returns.

One word: Habituation

Considering 75% of QE3 is already priced into the market via hopium (i.e. Dow would be sub 10k without the threat of easing) no government stimulus can prop this turd up. One reason QE's eventually fail is because markets expect them, front run them, and the subsequent pop is small. It requires the next one to be bigger for psychological reasons (surprise/euphoria, etc).

We're getting close to that point, so earnings will soon be the last grasp for the bullish shills. For that reason alone they matter.

Mon, 07/09/2012 - 17:01 | 2599939 Silver Bug
Silver Bug's picture

The whole show is a farce. The paper gain has become horribly rigged.


Buy Silver, Save in Silver. Protect your Wealth.

Mon, 07/09/2012 - 15:51 | 2599694 wee-weed up
wee-weed up's picture

Losses Season Preview

Mon, 07/09/2012 - 15:50 | 2599687 DoChenRollingBearing
DoChenRollingBearing's picture

Cash and gold, bitchez.

I really think that we are going to soon hit a hard wall.  If OBAMA "sez" he wants to keep the Bush Tax Cuts, then something is up.  They must see danger ahead.

Danger means saving...  Cash and gold.  Some silver too, unless you already have enough.

Mon, 07/09/2012 - 15:57 | 2599724 adr
adr's picture

So company A can post a loss of $185 million or more for every quarter, yet the company's stock can continue to hit all time highs because the loss could have been $250 million?

Are we being set up for, oh my god it could have been worse so its the best ever, again?

I like the full retard rally in nat gas futures today moving in tandem with crude. Did the Norway oil strike somehow cause less nat gas to be on the market?

"Investors" pulling out of stocks and pumping money into cmmodities before earnings season?

My only wish is a world that the price of something is determined by the value and demand of it, not because some suit in NYC thinks it is a good bet to risk next months bonus on.

Mon, 07/09/2012 - 15:58 | 2599730 john_connor
john_connor's picture

Companies can just buy back shares thus reducing denominator and increasing EPS.  Who cares.

Mon, 07/09/2012 - 16:04 | 2599755 PontifexMaximus
PontifexMaximus's picture

Earnings do not matter......now....., election year, , BO already made it, BB giving grat assist, therefore, algo game as usual. Move on!

Mon, 07/09/2012 - 16:08 | 2599772 eclectic syncretist
eclectic syncretist's picture

volume today was only ~50% of the 3 month average.  Not very impressive.  Alcoa reports a quarterly loss of 2M after hours.  Not very impressive either.

Mon, 07/09/2012 - 16:17 | 2599805 mayhem
mayhem's picture

I bet Bernanke wants a market reset in July more than anyone.

Mon, 07/09/2012 - 16:18 | 2599809 Shizzmoney
Shizzmoney's picture

A) Corporations are going to start whining now, as it is election (otherwise known as "auction") year and they want to make sure they have concrete things to point at when they visit both candidates and tell them why they need another tax break or else they will cut jobs (and hire people in China or India).

B) The Fed will also gladly assist the corporations in reporting lower profit, as it helps their most-wanted QE3 case.

C) I can't wait for continued reported losses.  I hope the businesses who assist the Fed to milk and dime the public at every turn in favor of short term loans->profits get every single bit of negative news they can get.  Even if they made upteenth profit, they aren't going ot hire anyways.  Fuck 'em. 

We need more layoffs.  Maybe then people will wake the fuck up that is ain't left v right, its us v them.

Mon, 07/09/2012 - 16:23 | 2599829 Meesohaawnee
Meesohaawnee's picture

earings,ebita, pe whatever. its all irrelevant thanks to the fact that one single human has rendered the global equity market a complete abortion. Mommy make it stop!

Mon, 07/09/2012 - 16:43 | 2599896 radicall
radicall's picture

Earnings estimates down 3% and counting, S&P returns 7.5%+
those analysts got one thing right - this years gains are going to come from multiple expansion.

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