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Goldman Summarizes Q3 Earnings' Key Themes As CEO Confidence Ebbs

Submitted by Tyler Durden on 11/10/2011 02:54 -0400

The last few weeks have seen numerous discussions of the less-than-perfect quarterly earnings picture and outlook and despite an endless barrage of 'well, 73% of firms beat expectations', it is the outlook that is critical to understanding valuations. With CEO Confidence, from Chief Executive magazine, at its lowest in a year and having dropped at its fastest rate since the first quarter of 2009, Goldman dissects the conference calls of Q3 earnings to discern four key themes: Uncertainty is hurting confidence and reducing activity, a more cautious tone on margins, and belief/hope in emerging markets' ability to power growth. Goldman's 'Beige Book' equivalent provides all the detail one needs to comprehend what is at best a defensive strategy going forward.

From the top of the firm down, CEO confidence is starting to disappoint. While mainstream media can always find a friendly smiling face who sees no slowdown anywhere, surveys of CEO confidence in the 1Y outlook (by Chief Executive magazine) are the lowest in a year. However, what is most important is the trend and the chart below shows the six-month change in CEO confidence is as negative as it was during the middle of the crisis.

David Kostin and his team from Goldman delve from the bottom-up finding the following four key themes:

Theme 1: Uncertainty influences management confidence

Uncertainty in the US and global economy and policy frameworks remained the preeminent theme discussed by management in 3Q earnings conference calls. Echoing 2Q commentary, firms pointed to uncertainty in the US political landscape, the European debt crisis, and customer activity as cause for an obfuscated outlook.

Examples: SLB, BLK, JPM, SPG, JNJ, ADP, INTC, MWW, APD, AA, HON, MCD

Theme 2: Companies pull back to manage uncertainty

Companies curtailed business activity to address pervasive economic and political uncertainty. Managements highlighted cost cutting, inventory draw-down, postponed hiring, delayed investment, cash retention and less precise guidance as a result of the unsteady environment. Customer behavior showed similar characteristics.

Examples: INTC, MWW, APD, MCD, STT, MMM, ATN, BRCM, EMC, FCX, BAC, ADP, AMZN,GLW, UPS

Theme 3: More cautious tone on margins

Management sounded a more cautious tone on margins than in previous quarters.Margins remain strong for some companies but are under pressure for others in a clear shift from the generally uniform strong margins earlier this year. That dynamic is consistent with our expectation that margins will peak in 2011 and decline modestly in 2012. Company reactions include higher prices, cost controls, and product mix.

Examples: PEP, DD, PM, ITW, DOW, APD, BBBY, ORCL, GLW, ADP, MCD, XOM, XOM, INTC, GIS, COST, CAG, AA, KO, IR, UTX

Theme 4: Emerging markets continue to drive growth

Business in emerging markets continued to power ahead despite weakness in the US and Europe. While the pace of growth slowed in China, relative strength in Asia, Latin America, and Eastern Europe continued to drive remarkable top-line growth as companies increased their focus on EM consumers.

Examples: INTC, IBM, COH, VFC, SLB, CAT, AAPL, PM

Which leaves them with the following bottom-up outlook for the S&P 500:

It is perhaps not surprising then that investors are derisking - no matter how much the temptation to double-down on the next GMCR to make your year's bogey, no matter what the tracking error - a miss is better than a zero - ask JAT!!