The Most Surprising Chart Of Q1 Earnings Season So Far

Tyler Durden's picture

22% of the Q1 earnings season (by market cap) is over, and anyone listening merely to soundbites and reading media headlines would likely think that stocks have soared as a result of a relentless parade of beats. One would be mistaken. In fact, as the chart below shows, there is something very wrong with this earnings season...

Well isn't that special: the average return of all companies beating both the top and the bottom line three days after the report is... down 1.2% (less odd is that companies missing the top line are getting trounced more than double to the downside, or down 2.6% at T+3 on average)? Is there more to this earnings season that meets the eye? It would appear so. Morgan Stanley explains:

With 22% of the S&P 500’s market cap reported, earnings results are mixed. Aggregate earnings are tracking 5.9% ahead of consensus expectations driven by a combination of cyclical growth (AA and AXP), structural improvement (JPM), and tax related gains (IBM), whereas revenue (ex Financials) is pacing modestly above estimates at 0.6%. Yet, the financials sector (18 companies reported thus far) has contributed over 40% of the earnings beat, while GOOG, IBM, and ORCL alone have contributed an additional 17%. The remaining 57 reported companies have accounted for less than 40% of the upside (Exhibit 2 – sidebar right). So far during this earnings season, BBY, C, GCI, FDX, IBM, and INTC have reported in-line or missed revenues but beat on earnings.

In other words: skew. Just like AAPL is now the core marginal stock of the entire market, just 3 companies, GOOG, IBM and ORCL, and the Financial sector in general (which is neck deep in so much "one-time" DVA and otherwise accounting-based trickery we wouldn't know where to even begin) account for more than 60% of the EPS upside!

Desperate for any good news, EPS estimates have already starting trickling up on earnings season so far:

Both 2012 and 2013 consensus earnings estimates have started inching up (Exhibit 1 – sidebar right). The 2012 EPS estimate, currently at $106.16, reached a near-term bottom of $105.34 in February 2012, while the 2013 estimate troughed at $118.47 in early March versus the current reading of $119.24.

There is however one simple reason why the market is less the jubilant about recent earnings "beats" - they all come on trails of aggressive recent trimmings to near forecasts, all at the expense of hockeysticking latter part of the year expectations.

Consensus revenue growth expectations (excluding energy and financials) are 6.5% in 2012 and 5.8% in 2013. This is lower than the 8.2% growth achieved in 2011. We think it is sensible that the revenue growth expectations are lower for 2012 and 2013 versus 2011 but don’t think estimates embed risks like the 2013 fiscal cliff or a recession in Europe. At the sector level, 2012 earnings growth expectations are highest in financials, technology, and industrials. The lowest growth estimates are in utilities, telecom, and health care.

And the one place where this is more obvious than anywhere: margin expectations, which somehow the consensus see soaring in 2013 after what has now become a very tepid 2012 (despite irrational exuberance toward the mid/late part of 2011).

Excluding energy and financials, incremental margins are expected to contract to 8.7% this year from 13.1% in 2011. 2012 incremental margins have been materially reset lower—the pace of margin reset has been sharp since early June 2011 and margin expectations now appear reasonable. We continue to think the bigger risk is on the revenue line. For 2013, both revenue and incremental margin expectations, at 18.8%, seem high, and we suspect this will come down as the year progresses.

In other words, with much more downside risks associated with the longer-term corporate outlook (fiscal cliff, Europe, China slow down), the market has once again reverted to its "show me" phase, where Q1 results are good, but simply not good enough to where mere hockeysticks in expectations will offset the overhanging fears of a global slowdown. If that is indeed the case, the recent sell-side near-term forecast slashing may end up hurting companies more than benefiting them.

On the other hand, perhaps lower stocks is precisely what the doctor ordered: after all the NEW QE will need not only continued non farm payroll weakness (and flattish inflation of those items that nobody cares about because the Fed just does not track the balance), but also at least another 15% drop in equities from here...

Finally, to summarize earnings season to date:

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sabra1's picture

word has it, that a canadian company has hired by the US, to create a program that would close all ATM machines simultaniously, and to cipher money out of accounts before putting the power back on!

i-dog's picture

Keeping cash in a bank account, or PMs in a bank "safety" deposit box, is like a hen storing her eggs in a foxhole!

Peter Pan's picture

That's what they should have done back when the GFC hit. Had they taken out 10% out of everybody's account, given shares for those withdrawn funds to depositors and also taken the write-off on bad mortgages, we would now be recovering and those shares would also be rising in value.

Let's face it, depositors are much like shareholders and should have taken some of the pain, but because the owners of banks did not want to see their shareholding diluted, it did not happen.

Pegasus Muse's picture

PP must have missed this.

Money as Debt

"Paul Grignon's second presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is an entertaining way to get the message out. The Cowichan Citizens Coalition and its "Duncan Initiative" received high praise from those who previewed it. I recommend it as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system in Canada, the United States and in whole Europe." 

DavidC's picture

Notwithstanding the results and the interesting piece above, we have the Facebook IPO in May - could the market start falling before then?

I reckon there's going to be a big incentive to keep the market up to draw in IPO 'investors' who will get seriously dumped on immediately after (I live in the UK and, even here, I've had one or two people saying that they want to get in on the Facebook launch. I've told them to steer clear).

Could I be wrong? Possibly short term.


trebuchet's picture

with low unemployment, productivity is better/higher in most companies and so earnings beating expectations. 

Analysts tend to underreact (2011H2 was undereaction to recovery prospects) but update expectations by q1 end closer in line with actual earnings. statistically speaking. 


of course lots of other things mentioned by author = downside risks so caution still warranted

ebworthen's picture

More cotton candy.

Lots of happy talk out there.

Morgan Stanley "beats" despite trillions of derivatives exposure and "hide the skeletons" accounting.

This is all going to come out of our pockets.  They will eliminate cash, raise taxes, captial gains, death taxes, and milk every last cent and piece of property from us.

They won't need FEMA camps, they'll just slowly erode the ability of almost everyone to live free.

sessinpo's picture

FEMA camps are for displaced peoples that are scrounging around for basic necessities like food. Very likely many will go missing. The rest of us will die with a gun in our hands.

Ned Zeppelin's picture

+1 for the gun in hand crowd

sabra1's picture

so why aren't all of you 350m americans taking on a few hundred so called controllers? are all of you guys already on your knees? US soldiers will side with the people, especially knowing that they are being injected with slow kill drugs, etc. DO SOMETHING ALREADY!!!

Themarcus00's picture

We will when the anger/courage outweighs the apathy/fear. Right now it's like 15-85 IMO.

Westcoastliberal's picture

The iphone/tablet craze is about to fall flat on its face as the market is totally saturated.  Consumer's discretionary income is going into their gas tanks.  IMHO we're tetering at the edge of a cliff and it's a very long way down.

Also don't forget on the one hand we have millions who are inches away from losing their unemployment benefits....

And on the other hand we have millions who've been living mortgage payment free for the past couple of years, and the axe is about ready to fall.

I don't need charts and graphs to understand what's really happening on Main St. USA.

rosiescenario's picture

Not that I am disagreeing, but just why is HOG's stock doing so well?


Of all the totally unnecessary, very expensive toys I can think of, a Hog is in the top 5....yet the stock just keeps going up, especially last Friday.


"just why is HOG's stock doing so well?"

Because it does not make any sense. Look at Home depot, a total P.O.S. bassakwards company, run and 95 percent filled to the rim with moron employees. All the Home Depots I have been to in the last three years were ghost towns with tens of millions of dollars of inventory just sitting on the shelves, yet look at their stock price(Dow 30 proxy). 

neidermeyer's picture

HOG was a bernanke recip of free money back in 2008 ,, they used that  cash to show a profit at their financing arm and crush people (me included) that had HOG PUTS ,,, I was in 3 different HOG dealers every week for a quarter watching heir salesmans leader boards and KNEW their sales were down bigtime and they posted a huge BEAT by putting bernanke bucks to the bottom line ,, they only disclosed the fraud years later.. FUCK BB...


To put it in short form ,, HOG is a fave of the regime ,, they have been designated as a survivor despite crap products and unrealistic pricing , their sales come purely from offering financing that nobody else would or could offer to people in the situations they finance..

LongSoupLine's picture




HOG is simply another HFT and hedge ramping tool.  Don't look at as a company, look at it as a market laundering and ponzi vehicle.  period. 

junkyardjack's picture

Investors can't have their cake and eat it too.  Analyst have lowered their estimates enough so that companies are able to finally beat them, investors can't now start selling when companies beat earnings too.  How is Wall Street supposed to steal from investors? All we can hope now is that Obama is re-elected to bail out Wall Street again.

q99x2's picture

Used to be fundamentals; now it is FED fundamentalism that matters.

Ned Zeppelin's picture

Charts to help explain the plainly evident: the American equity markets are on a combination of Fed Printing, HFT, PPT moves, and financial steroids.

orangegeek's picture

The move up in the indexes, since December 2011, was in small daily increments with very low volume.  This is not a sign of strength.


For those Apple stock holders who missed unloading at or near the top, they should have looked at the NASDAQ 100 - which peaked a full seven days before AAPL did.


Have a look for yourself.

Bellaraphon's picture

Can someone please tell me what DVA stands for? I've found multiple definitions online, and none seem to make sense in this context