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Forget Earnings Beats, Forward Expectations Are Rolling Over Rapidly

Tyler Durden's picture


For some reason, investors' goldfish-like brains forget every quarter that time and again around 70% of names beat expectations and this fact is used as reason to buy buy buy. Certainly this time around, earnings beats are well within historical norms and furthermore are simply beating significantly lowered expectations. However, that is backward-looking and no matter what metric you use for valuation, the only one that really counts is how expectations are priced into the market. With regard to this, 12 Month forward EPS expectations have started to roll-over quite significantly for the S&P 500 (at around a -8.5% annualized clip) - the last time we saw this was Q4 2007 and we know how well that ended.

Actual S&P 500 earnings are 4.15% above previous peak levels and expectations for the next 12 months are 4.76% higher than at their previous peak level. Note that CPI rose 7.9% during this period so we are actually seeing earnings drop (admittedly that is USD CPI versus a rebased USD earnings number from global revenues). What is also interesting to note on the chart is the growing divide between expectations and actual earnings as we rallied - with expectations rising faster and faster - it seems reality is starting to set in to expectations and perhaps multiples might also start to reflect that soon.

The key for us is the start of what is evidently a rolling over in forward expectations for earnings. As stimulus roll off, this is hardly surprising and perhaps is a better fit to our parade of sentiment based indicators than a 'manufactured' GDP print which will be revised again and again over the next few months. Critically, the pace of the drop in forward EPS is rapid and while many will argue that containing the European risk premium puzzle may be the solution, it seems that growth will continue to lag in Europe, China growth will be 'carefully monitored', and without some miracle the super-committee is hardly likely to deliver anything other than a low/slow/no growth inducing fiscal effort in the US.

Chart: Bloomberg

hat-tip John Lohman


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Thu, 10/27/2011 - 15:35 | 1818378 GeneMarchbanks
Thu, 10/27/2011 - 15:37 | 1818386 topcallingtroll
topcallingtroll's picture

Its time to party!
Maybe next month will be time to be scared.
Buy buy buy! (Stocks that is)

Thu, 10/27/2011 - 15:38 | 1818391 IQ 145
IQ 145's picture

Earnings Beats? "Beatings will continue until morale improves". You gotta admit the crazy little bastards are hell for optimism.

Thu, 10/27/2011 - 15:58 | 1818475 Doode
Doode's picture

Considering the "market crash" on death of Greece and other huge problems prophesized there is a strong chance that nothing is going to happen! Especially this Lohman guy. He was wrong on too many things that are huge (like this rally - the largest since 1987) - not buying any of it (except for the stocks :)). Things are going to be just fine - at worst no worse than the lows we have already seen in the last month.

Thu, 10/27/2011 - 15:59 | 1818478 ChitownTrader
ChitownTrader's picture

If anyone thinks that any index gaining 25% in 3 weeks is sustainable you will lose all your money unless you simply enjoy buying high and selling low! TIME TO SHORT

Thu, 10/27/2011 - 16:51 | 1818672 Racer
Racer's picture

The indices have got to try to keep up with real inflation

Thu, 10/27/2011 - 16:14 | 1818549 Saxxon
Saxxon's picture

I saw that one too.  YHOO has turned into a cesspool, the National Enquirer of the Internet.  The site is barely tolerable. 

I still like the way they marshall stock and sports info so I continue to proceed thereto; but I try to avoid the pages obviously devoted to the great unwashed (E.g., "Penny Stocks are the Key to Happiness").

Thu, 10/27/2011 - 15:37 | 1818387 Ancona
Ancona's picture

The only perople who seem to regognize the ponzi is breaking are here on ZH.

Thu, 10/27/2011 - 16:01 | 1818489 B-rock
B-rock's picture

...It's good to see that truth, but don't trade on it.

Thu, 10/27/2011 - 17:00 | 1818696 LawsofPhysics
LawsofPhysics's picture

It really doesn't matter dude.  Jump in, if you have paper you are going to be super rich, we all are.  Now whether or not that paper actually buys anything is the real issue.

Thu, 10/27/2011 - 19:31 | 1819115 UP Forester
UP Forester's picture

Irrational Exuberance!!!  Greece is Saved!!!  Stocks are Cheap!!!  I'm all in NFLX, BAC, AMZN, and MF!!!!

My bank is going to take a 50% haircut on my mortgage!!!


They better, I can't afford gas, or food, or beer, or iPads, or med insurance, or anything else of consequence....

Thu, 10/27/2011 - 15:39 | 1818390 Cheesy Bastard
Cheesy Bastard's picture

I do not think investors have goldfish-like brains.  Goldfish are not self aware, Skynet is.

Thu, 10/27/2011 - 15:42 | 1818406 GeneMarchbanks
GeneMarchbanks's picture

A self-aware market maker that is.

Thu, 10/27/2011 - 15:55 | 1818457 Cheesy Bastard
Cheesy Bastard's picture

Market makers make me make a Makers Mark.

Thu, 10/27/2011 - 16:17 | 1818556 Liquid Courage
Liquid Courage's picture

Goldfish brain:

Hey, look, a castle! ... glubglub ... and a plant ... and a rock ... glubglub ... and another plant ...

Hey, look, a castle!

Thu, 10/27/2011 - 15:40 | 1818393 Stoploss
Stoploss's picture


Thu, 10/27/2011 - 15:45 | 1818421 SheepDog-One
SheepDog-One's picture

401K / pension trap...this will all be paid for by them soon.

Thu, 10/27/2011 - 15:58 | 1818473 junkyardjack
junkyardjack's picture

More like the Bull is going to rip the eyes out of the matador 

Thu, 10/27/2011 - 16:11 | 1818538 Manthong
Manthong's picture

Also known to evolve into a "suckers rally".

Thu, 10/27/2011 - 15:40 | 1818394 Belarus
Belarus's picture

The last time the market had this kind of run was January 1987. Does anyone remember what happened that year?

Thu, 10/27/2011 - 15:45 | 1818418 Tsar Pointless
Tsar Pointless's picture

U2 had two number one songs.

I turned 17.

Madonna was allowed to make another movie.

Oliver North lied under oath and became a right-wing hero.

Gary Hart got in trouble for banging some woman.

I think there was some trouble in the stock market that year, too.

I could be mistaken.

Thu, 10/27/2011 - 19:41 | 1819146 UP Forester
UP Forester's picture

Hershey bars were 35 cents, and 16 oz plastic (or glass) bottles of pop were 60 cents....

Thu, 10/27/2011 - 15:47 | 1818429 wandstrasse
wandstrasse's picture

hmmm what was 1988.... Lady Di died?

Thu, 10/27/2011 - 16:07 | 1818524 JB
JB's picture

That was '98. ;)

Thu, 10/27/2011 - 18:55 | 1818999 moriarty
moriarty's picture

1997 year I got married.

As chance would have it I was born the same year. Supposedly by some metrics she was a very wealthy woman (which of material needs/wants she almost certainly was).

Sadly she is dead but at the time of writing I live on to see my daughter grow & I am the fortunate one.

Such is the life of men – all else is detail & circumstance.



Thu, 10/27/2011 - 15:47 | 1818433 Johnk
Johnk's picture

Yes, the S&P 500 ran up another 20% before crashing.

Thu, 10/27/2011 - 15:50 | 1818445 Deadpool
Deadpool's picture

Robotrader last got laid.

Thu, 10/27/2011 - 15:58 | 1818470 sabra1
sabra1's picture

by janet napolitano!

Thu, 10/27/2011 - 16:14 | 1818547 SeverinSlade
SeverinSlade's picture

It must have been fast and furious.  I'm sure that's where Mr. Napolitano got his idea from.

Thu, 10/27/2011 - 16:00 | 1818480 Instant Wealth
Instant Wealth's picture

Exactly 25 years ago:


10-27-86: sudden deregulation of the financial markets by Margaret Thatcher, the Big Bang.

Anyone surprised by today´s rally ?

Thu, 10/27/2011 - 16:40 | 1818637 Instant Wealth
Instant Wealth's picture

uhh ... Rotten Albion junked me.

Thu, 10/27/2011 - 15:40 | 1818398 Irish66
Irish66's picture

Oh it feels good,  finally placed a trade.


Thu, 10/27/2011 - 15:46 | 1818425 SheepDog-One
SheepDog-One's picture

Youre buying in right here? You must need a wheelbarrow to cart your balls around.

Thu, 10/27/2011 - 15:47 | 1818434 Irish66
Irish66's picture

didn't say what i bought though...feels great

Thu, 10/27/2011 - 15:51 | 1818449 Deadpool
Deadpool's picture

hopefully a 20 year old Colleen.

Thu, 10/27/2011 - 15:44 | 1818400 bullnutz
bullnutz's picture

Interesting rumors coming out on a couple of miners this morning from regarding great panther and endeavour potential merger.  Great Panther is one of my favorite stocks, but I dont understand why they don't follow First Majestic's business model in offering bullion to the public.

I wanted to invest in a miner with direct bullion sales which are competitive with a company like APMEX.  Anybody have any suggestions?

Thu, 10/27/2011 - 16:18 | 1818559 Saxxon
Saxxon's picture

Bullnutz what do you think of BONZ.PK?  A scam?  Thnking of buying a lottery ticket . . . haven't done this in years . . .

Thu, 10/27/2011 - 17:14 | 1818733 Doubleguns
Doubleguns's picture

Great panther DOES sell bullion.

Thu, 10/27/2011 - 15:41 | 1818404 lizzy36
lizzy36's picture

Well this does feel like October of 2007.

That efficient market hypothesis sure is awesome :)

Thu, 10/27/2011 - 15:42 | 1818405 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

Time for the rating agencies to come out with a couple of downgrades for European countries...

... the Bernank needs a stronger $dollar, he's impotent with a weak dollar.

Thu, 10/27/2011 - 15:46 | 1818423 SeverinSlade
SeverinSlade's picture

I'm pretty sure Mr. Chairsatan is and will always be an impotent little twit with a 1/3" pecker with or without a strong dollar.  Only someone like that would aspire to be the Chairman of the Federal Reserve.

Thu, 10/27/2011 - 17:23 | 1818755 Panafrican Funk...
Panafrican Funktron Robot's picture

I think the weakening as of late is partly a front-run of Bernank's November 2nd news conference.  

Thu, 10/27/2011 - 15:44 | 1818408 firstdivision
firstdivision's picture

Anyone else see that massive spike in SPY volume at about 12:22?  Looks like a large institution decided to sell this rally hard. 

Thu, 10/27/2011 - 18:22 | 1818909 oceanview76
oceanview76's picture

Yeah, I saw that.  Hope they didn't have to close that by end of day today.  That would have sucked bad.

Thu, 10/27/2011 - 15:43 | 1818409 Johnk
Johnk's picture

Still a huge wall of worry on ZH and elsewhere.  Fear and greed. 

A month ago, we had great fear.  All the bears were very, very, very confident and cocky, just like bulls in 2000 (and bears always have the best arguments).  Now that the widely-predicted end of the world has been postponed for a bit, greed is returning with a vengeance.

Since when do fundamentals or facts matter in this market? (except of course in the long term, but what's that saying about the long-term?

To use another cliche, the market can remain irrational far longer than the shorts can remain solvent.  I think Bernanke is quite happy today, the bastard.

Thu, 10/27/2011 - 15:47 | 1818435 SheepDog-One
SheepDog-One's picture

No fear or greed at all here...just watching this clownshow unfold, the BigTop looks ready to cave in on everyones heads.

Thu, 10/27/2011 - 15:48 | 1818440 Belarus
Belarus's picture

I don't know why Bernank would be happy. There is no way he can save the world during a melt-up, nor can he funnel more tax payer money to the PD's. The coordinated take-down will commence shortly. They have to have a reason to monetize debt to make it appear they are monetizing the debt for completely "other" reasons other than there's no way to plug the unfunded deficts without LSAP. 

You can't have no fear in the market for long: treasury yields would contineu to climb, which would continue to burden the unfunded gap....of course, Ben has lost control already. But he's so cokcy he'll try to regain as the robots are turned off for awhile, ramping prices inversely to today....bringing down WTI signficantly, etc. 

It's there only option. And see the negativity with Goldman? It's so they can have a "I told ya so moment."

Thu, 10/27/2011 - 16:16 | 1818552 jmac2013
jmac2013's picture

Just to play devil's advocate.  First, aren't the PDs some of the biggest stock holders, so the market going up is a defacto funnel to the PDs.  Second, the european bailout is a debt monetization.  Also, isn't Obama propsing some student loan bailout whereby the taxpayers pick up what students can't repay?  That will be a huge bailout coming.  And there is the mortgage bailout, which I believe will still come in some shape or form, and will be easy to sell to the masses. 

I don't think treasury yields really mean dip diddly to the US because they can simply monetize the debt if they choose.  Rising yields are only big problems to countries like Greece who cannot print euros to meet their debts.  Further, rising debt costs will just make it easier for the US, and everywhere else for that matter, to bring forth the austerity they are so dying to put on everybody.

I subscribe to the 'slow burn' that Catherine Austin Fitts describes, lower real wages and higher prices, a nice steady squeeze like boiling a frog.

Thu, 10/27/2011 - 19:29 | 1819106 CPL
CPL's picture


Thu, 10/27/2011 - 19:47 | 1819162 i-dog
i-dog's picture

+1 ... My thoughts exactly. Monetizations everywhere, and further syphoning of wealth to the PDs ... until 3Q 2012.

It really is like watching kids picking up pennies in front of a steam roller!

Thu, 10/27/2011 - 15:53 | 1818446 homersimpson
homersimpson's picture

Well, unless the market/gov't bans shorts, the shorts will ALWAYS be around as long as the market is. There is just WAY too much payoff that makes shorts irresistable in this artificially propped up market, vs picking up nickels in front of a steamroller.

Thu, 10/27/2011 - 16:33 | 1818602 HellBoy6
HellBoy6's picture

Re: "picking up nickels in front of a steamroller."


Nice, summerizes exactly how I felt today...

Thu, 10/27/2011 - 15:53 | 1818451 Deadpool
Deadpool's picture

never fear, greed is here

Thu, 10/27/2011 - 15:55 | 1818456 CrashisOptimistic
CrashisOptimistic's picture

You're a bit glib, John.

If fundamentals don't matter, then why would emotions when 80% of trading is computers?

The algorithms are reading headlines and government intervention is as much in front of microphones as it is in meeting rooms.  This is not a marketplace.  This is a hall of serial intervention, and there is no emotion about that.


Thu, 10/27/2011 - 16:00 | 1818481 Johnk
Johnk's picture

You make a good point. 

Thu, 10/27/2011 - 15:43 | 1818414 wandstrasse
wandstrasse's picture

Actual S&P 500 earnings are 4.15% above previous peak levels and expectations for the next 12 months are 4.76% higher than at their previous peak level.

the real economy is fine! the stock rally is nothing but a mere market expression of greatness! Hallelujah! forget about CPI, just celebrate the real economy is on the top where it belongs.

Thu, 10/27/2011 - 15:51 | 1818447 monopoly
monopoly's picture

We know what is real, what the truth is and how this will end. But until we get to that plateau where it all comes together it just does not matter....Until it does. I look at my boards and see oil going higher which means higher prices at the pumps, the dollar tanking which will ensure inflation as the Fed continues to destroy the middle class with their insane tactics. I look at broken banks, class warfare, spring breaking out all over the planet, a fix in Europe that my plumber would not buy, and we are almost 400 points higher.

Trying to fight it with what is real will get you wiped out. Never forget what is running this country, and that they will do whatever it takes to get re-elected. It makes no difference who or what they destroy. So sad, but we here are making some coin today from something that is real, not faked and has no Master.


Thu, 10/27/2011 - 15:51 | 1818448 user2011
user2011's picture

I think we can save the breath.  The market is not controlled by retail investors.  Indexes goes up with light volumes.   Stocks are push and pull by HFT.    Those TV and media analysis will always come up with some reason to push the market up anyway.      If the earning sucks, they can say the company future is promising.   If the future sucks, they will just highlight the excellent results of the quarter.   Or push the stock up because the indexes are up.

The gove won't interfere the market melting up.   Election year, they need to push everything up.    And since SEc/gov has acquired all the Algorithm of the HFT from different brokerages, they themselves can push any indexes up.

For regular retail investors,  let's hope he can get out before everything collapse.




Thu, 10/27/2011 - 15:54 | 1818455 common_sense
common_sense's picture

Investors? which investors? FED and ECB, BoE, etc etc, are now INVESTORS ???  DON'T THINK SO... but still believing in hedge funds to arrange this kidding mess.

Thu, 10/27/2011 - 15:56 | 1818462 slewie the pi-rat
slewie the pi-rat's picture

if ther EURooooooooo keeps going ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ and ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

wtf, who needs earnings? 

breaking news from europe:  the ECB has announced it will support the swiss franc @ .833333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333333


Thu, 10/27/2011 - 16:02 | 1818496 Miss Expectations
Miss Expectations's picture

I read someplace that when a child begins to color within the lines, he is changed forever.

Thu, 10/27/2011 - 16:16 | 1818553 slewie the pi-rat
slewie the pi-rat's picture

so, who do you like in the world series? 

Thu, 10/27/2011 - 15:58 | 1818469 ChitownTrader
ChitownTrader's picture

If anyone thinks that any index gaining 25% in 3 weeks is sustainable you will lose all your money unless you simply enjoy buying high and selling low! TIME TO SHORT

Thu, 10/27/2011 - 15:58 | 1818476 SheepDog-One
SheepDog-One's picture

FED still desperate to pass off their pump to retail....aint gonna happen.

Thu, 10/27/2011 - 16:04 | 1818508 mynhair
mynhair's picture

Frigging $ drop will make up for earnings misses.

Thu, 10/27/2011 - 16:07 | 1818521 praps
praps's picture

I can confirm that for the DOW as well.  I track the forecast EPS for the current year and future year.  Current year (2011) has dropped from a peak forecast of $131.74 on 3 June 2011, to $128.07 now.  Future year (2012) has dropped from a peak forecast of $146.90 on 12 Aug 2011 to $141.35 now.  The forecasts have fallen every week for the last 12 weeks.

Thu, 10/27/2011 - 16:19 | 1818564 Manthong
Manthong's picture

A good "twist" would simply be to mark expectations below forecast.

That should be good for another few hundred points on the Dow.

Thu, 10/27/2011 - 17:12 | 1818728 Doubleguns
Doubleguns's picture

Great panther DOES offer bullion. So buy them. Pay attention when paying for you bullion.


Thu, 10/27/2011 - 22:55 | 1819670 alexwest
alexwest's picture

when i read that kind of crap 'Actual S&P 500 earnings are 4.15% above previous peak levels' i thnk does person who writes this lives in parallel universe??

lets assume   ''Actual S&P 500 earnings' is right, so paid federal corp taxes  must also close or above previous peak?

is it true? of course its not...

12 month  rolling sum of  'paid federal corp taxes' AKA real verified money is running below  200 bln per year ( see daily/monthly treasury), so its alsmot 50% below 2007 peak..

so that means that actual spx500 earnings are close to 50-60 $..  so p/e ratio is way way above 20x...


just a thought


Fri, 10/28/2011 - 00:16 | 1819849 Hephasteus
Hephasteus's picture


Sales down x percent tax revenues cliff dive on all states. Companies are collecting taxes and keeping it.

Fri, 10/28/2011 - 01:33 | 1819947 i-dog
i-dog's picture

... or the sales figures are bogus. "Sampling error"!

Fri, 10/28/2011 - 04:51 | 1820067 Grand Supercycle
Grand Supercycle's picture

DAX monthly chart at blog shows recent bullish candle revealing aggressive short covering rally enclosed within big picture bearish pattern.

Bullish USD weekly/monthly and bearish SP500/DOW monthly
charts will eventually ensure a violent reversal of equity uptrend.

Do NOT follow this link or you will be banned from the site!