Financials Hide Analysts' "Earnings Recession" Expectations

Tyler Durden's picture


We know top-line numbers were a disappointment in Q2; but the long-only AUM-defending commission-takers will remind you that 'stocks are cheap', '...valuation...', 'money on the the sidelines', and on the surface there was a 6.9% increase in EPS from Q2 2011 (growthy and as UBS notes - anything but anemic). But, like every good story, the truth is darker under the surface; looking at earnings growth (i.e., without the impact of shrinking share counts) excluding prior-period Financial sector writedowns, we see an outright earnings contraction. Further, consensus estimates are calling for EPS growth to go negative in 3Q12 - falling to $25.07 from $25.65 - which will make two quarters in a row of negative earnings growth - what we would consider an earnings recession.


UBS: The Q2 Growth Mirage

With results for 494 companies in the books, it appears 2Q EPS for the S&P 500 will come in at $25.80 — roughly in line with our $25.75 estimate. On the surface, this represents a 6.9% increase from 2Q11 — a growth rate that is anything but anemic. However, looking at earnings growth (i.e., without the impact of shrinking share counts) excluding prior-period Financial sector writedowns, we see an outright earnings contraction.

More specifically, earnings for the S&P 500 ex-Financials declined by 1.5% (table above), while revenues were down 0.2%. Notably, we exclude Financials because the sector’s results are often skewed by one-time items and debt valuation adjustments, which mask the broader earnings trend. For instance, Bank of America’s Countrywide write-off reduced EPS for the overall S&P 500 by $1.30 (i.e., 5.1%) in 2Q11, thereby overstating 2Q12 earnings strength.


Further, consensus estimates are calling for EPS growth to go negative in 3Q12 — falling to $25.07 from $25.65. The chart above, which highlights the earnings growth of the S&P 500 ex-Financials (excluding buybacks), shows that we now have two quarters in a row of negative earnings growth — what we would consider an earnings recession.

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Tue, 09/04/2012 - 20:13 | 2762648 Squid Vicious
Squid Vicious's picture

bullish!! not long before the performance chasing/santa claus rally!! we're gonna shoot over this fiscal cliff just like Evel Knievel at the Grand Canyon... oh, wait

Tue, 09/04/2012 - 20:20 | 2762688 Ahmeexnal
Ahmeexnal's picture

More like Wile E. Coyote

Tue, 09/04/2012 - 20:39 | 2762755 Michael
Michael's picture

For information purposes only;

Tonight: Ron Paul on Jay Leno 9/4/12 - Live Stream

Tue, 09/04/2012 - 20:09 | 2762652 Jlmadyson
Jlmadyson's picture

So tired of being lied to each and everyday.


News to traders, CNBC, Cramer, Liesman, et al.


Bernake and Draghi will save nothing.


Wake up and look at all the data and tell me this isn't 2007 leading up to 08. But this time we are in much more perilous condition with Europe tipping as well and mountains more of debt.


Wake the shit up.


Justice shall be reaped.

Tue, 09/04/2012 - 20:25 | 2762707 LongSoupLine
LongSoupLine's picture

yep, and to think...those are the fudged numbers.

Tue, 09/04/2012 - 20:12 | 2762663 buzzsaw99
buzzsaw99's picture

s&p earnings got facebooked, er, corzined, er...

Tue, 09/04/2012 - 20:15 | 2762671 Jstanley011
Jstanley011's picture

So, is that bad?

Tue, 09/04/2012 - 20:26 | 2762713 Nevermore Peabody
Nevermore Peabody's picture

The toppings contain potassium benzoate.

Tue, 09/04/2012 - 20:16 | 2762674 Tsar Pointless
Tsar Pointless's picture

This, on top of the ISM report showing a third month of contraction makes me feel rather...not bullish.

I think we're a lot closer to that big plunge than most can imagine.

The bears are going to be caught off-guard, as they are anticipating another "stick-save and a beauty" from Chairman Ben next week. And, the bulls are going to be caught off-guard, too, for the very same reason.

This time, on September 13, I think that this time, it will be different.

Year lows coming on the indices in October.

And those who own the world - and, of course, Wall Street - get their (next) man.

Tue, 09/04/2012 - 20:17 | 2762678 CrashisOptimistic
CrashisOptimistic's picture

Guys, stop.

You know full well HFT is moving the SPY and correlators align the index to SPY.  This is discussed frequently.

Why in hell would you think earnings matter?  

Guys this is not the world you grew up in.  You can't say this and then immediately try to measure it using old measures.  The S&P no longer exists.  Money didn't exist in the garden of eden; it was invented later.  It doesn't have to mean anything.  Its value can be redefined at a whim.

Buy farmland and wait for oil shortages to start getting coverage.  They are already out there (look up lines at Egypt gas stations early this year) but they don't get much coverage.

It's inevitable.  Don't be the last out the door.  Get out now and get something of value, which is pretty much farmland and only farmland.

Tue, 09/04/2012 - 20:17 | 2762679 rosiescenario
rosiescenario's picture

Margin compression....when raw material costs and energy rise faster than companies can raise prices for their products.


China will be really evidencing this situation.

Tue, 09/04/2012 - 20:31 | 2762729 Caviar Emptor
Caviar Emptor's picture



Tue, 09/04/2012 - 20:24 | 2762698 Hype Alert
Hype Alert's picture

And Fed Ex just cut the qtr ended Aug 31.

Tue, 09/04/2012 - 21:24 | 2762751 deflator
deflator's picture

 Fred Smith has been calling BS on "the recovery" from day one. He has said that we never came out of recession. FedEx keeps making money and growing even though Fred is bearish. I think he likes doing better than he thinks he can or something like that.


 He probably isn't happy with the Federal Reserve pumping either because it raised their operating costs and propped up assets they were positioned to acquire absent FED intervention.

Tue, 09/04/2012 - 20:26 | 2762711 insanelysane
insanelysane's picture

Guy on Bloomberg today said that China is not in a recession and their manufacturing is still going strong.

Tue, 09/04/2012 - 20:30 | 2762719 holdbuysell
holdbuysell's picture

Tyler, Energy, Materials, and Utilities appear to be the drivers for this decline in Q2: what sectors are part of the decline in Q3 (is this granularity available?)? I'm interested to know if/to what degree this is expected to spread to the other sectors.

E.g. FDX's lowered guidance for Q3 could indicate this spreading.

Tue, 09/04/2012 - 20:28 | 2762720 chump666
chump666's picture

China's subprime moment is it's steel industry implosion.

Forget about the APPL and Facebooks, commodities go to hell. Should send the HFTs into the panic to end all panics, that and profit taking Sept is upon us.

Tue, 09/04/2012 - 20:31 | 2762727 q99x2
q99x2's picture

Recession battles QE.

On this side of the ring we have the not so great Central Planner and DHS funding agent Ben Bernank. And, on this side we have cloaked in reality. Reality.

Here we go again.

Tue, 09/04/2012 - 20:32 | 2762732 max2205
max2205's picture

Pay no attention to the man behind the curtain

Tue, 09/04/2012 - 20:37 | 2762745 Caviar Emptor
Caviar Emptor's picture

Look this is the cheapest stock market in American history. Reminds me of 1826. If you had bought and held stocks since that summer, dollar-cost-averaged through depressions, wars and swindles, reinvested dividends and rebalanced your portfolio to sell bankrupt companies and replace them with up and comers, today you would be as rich as Ivanka Trump's poodle. 

Tue, 09/04/2012 - 20:47 | 2762786 RobinHood73
RobinHood73's picture

it is our Ukiyo (the floating world, as experienced by the Japanese during the Edo era) . It is not real.  The hype machine, controlled and manipulated at the front by the tail that wags-the-dog, AAPL. An earnings bomb a month ago and the shares rise 20% in parabolic fashion without even a 2% retrace since this negative release. Now the hype machine focuses on the orgasmic inducing iphone 5 that will be guaranteed to blow your mind .It doesnt matter the the NPV of future cashflows on a 300 gross margin would require every living person on the planet who can buy a phone to buy a phone , we live in the ultimate ukiyo. Facts are ignored. Wall street needs its sucker to diffuse these 2-year old accumulations to!!!!

Tue, 09/04/2012 - 21:53 | 2762977 Cognitive Dissonance
Cognitive Dissonance's picture

Welcome to the real world Neo.

Wed, 09/05/2012 - 08:01 | 2763873 ejmoosa
ejmoosa's picture

And the drop in year over year profit growth will lead to a drop in year over year employment at this level in twelve months.


Want to take a guess at which quarter is the most influential in the business planning cycle for 2013?  The third quarter.

Calculate the rate of year over year profitgrowth for four quarters ending September, and you will have a number that has a .91 correlation with the rate of job growth the following 12 months.

Next year at this time we will be asking "Where are the jobs?"

As the story says, we are masking just how bad it is with the financials, which are not necessarily real earnings, but just accounting moves.


It's gonna get

Starting with the next jobs report.








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agagshoes's picture

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