Previewing The Q4 "Hail Mary" Earnings Season

Tyler Durden's picture

Q2 earnings seasons is now (with 93% of firms reporting) over, and it is time for post mortem. The bottom line for those strapped for time is the following: In order to salvage the 2012 earnings consensus for the S&P, the sell side crew and asset managers, as wrong but hopeful as ever, are now expecting Q4 2012 earnings to grow 15% versus 4Q 2011, which is more than twice as fast as any other quarter. Indicatively, Q2 2012 earnings rose at a rate of 3% compared to Q2 2011. Elsewhere, revenues came 2% lower than consensus estimates at the start of the earnings season.

And the kicker: The S&P 500 bottom-up consensus EPS estimate for 3Q fell 4% during the past five weeks and management guidance has been more negative than usual. Consensus expectations imply no earnings growth for the S&P 500 versus 3Q2011. This number will certainly drop more and will be the first Y/Y EPS decline since the Lehman failure.

In other words, the entire year is now a Hail Mary bet that in Q4, the time when the presidential election, its aftermath, as well as the debt ceiling and fiscal cliff acrimony will hit a peak, a Deus Ex Machine will arrive and lead to a 15% rise in earnings. Why? Because global central bankers will have no choice but to step in and thus lead to a surge in EPS multiples even if the underlying earnings are collapsing. With the presidential election around the corner making Fed QE before 2013 now virtually impossible, with Spain (and Italy) refusing to be bailed out and cede sovereignty thus precluding ECB intervention, and with China spooked by what may be a surge in food costs, this intervention, and any hope that the Hail Mary pass will connect, all look quite impossible.

As the chart below shows, in this bizarro market, the lowest 2012 consensus earnings to date can only be matched by the highest PE multiple. Brilliant.

From Goldman:

2Q earnings results disappointed across the globe. In the US and Europe, P/E multiples have expanded more than fund managers might realize because earnings estimates are too high. The divergence between trends in earnings and valuation is likely to  become more pronounced as profit forecasts continue to be reduced in the coming months. In the US, our 2Q earnings season takeaways are: (1) disappointing sales; (2) in-line earnings; (3) margins are still declining; (4) 3Q estimates imply no growth while  4Q estimates imply significant growth; (5) earnings estimates are falling, driven by Energy and Materials.

2Q results by geography

For the US, sales disappointed more than earnings. 18% of ex-Financials and Utilities companies have posted positive revenue surprises by beating consensus sales expectations by at least one standard deviation, half the historical average. The number of firms that missed sales estimates was twice the historical average. Sales surprises were the worst since 1Q2009. The frequency of earnings beats and misses are largely in line with history.

In Europe, earnings season misses were driven by margins not sales. 239 companies, 54% of market cap, have reported. So far, the frequency of earnings beats, a surprise of 5% or more, is below the three-year average (33% vs. 43%), and misses are slightly higher (40% vs. 37%). Sales results have been modestly positive. Analysts significantly revised down Banks earnings. FY2012 estimates are down 9% over the past month.

In Japan, companies reported further earnings declines. 90% of TOPIX companies (95% of market cap) have reported earnings. Results so far have been disappointing especially in context of the April-June 2011 quarter. Last year, supply chain problems following the March 2011 earthquake resulted in a weak earnings season. Yet operating earnings for the April-June 2012 quarter are down 7.4% year over year. Revisions and guidance have remained muted, which our Japanese strategists see as a sign of  caution in the face of macro uncertainty going into 2H.

Across Asia, Consumer Discretionary companies posted stronger results relative to consensus estimates. Similar to results in the  United States, Energy and Materials posted the weakest results relative to consensus estimates. Singapore posted the strongest results relative to consensus while Taiwan was weaker.

In the US and Europe, P/E multiples have expanded more than fund managers might realize because earnings estimates are too high.

1. Global EPS forecasts are too high. Our top-down, full-year earnings forecasts imply further downside to consensus estimates in the US, Europe and Japan. In each region, the difference between our top-down 2012 EPS growth forecast and bottom-up consensus growth is about 3pp. Our MSCI Asia Pacific ex-Japan earnings growth estimate is in line with consensus.

2. In the US and Europe, P/E multiples have expanded more than fund managers realize. The strong rally in global equity markets during the past five weeks means portfolio managers have re-rated stocks based on policymaker promises rather than fundamentals. On consensus NTM EPS, the S&P 500 P/E multiple expanded from 12.6X to 12.9X. The Stoxx multiple rose from 10.0X to 10.7X over that same period of time.

3. Consensus earnings estimates declined in all regions over the last month. Full-year 2012 estimates fell 4% for the Stoxx 600 while Topix (FY) and MSCI AP ex Japan forecasts each fell 3%. S&P 500 estimates fell 1%.

4. Meanwhile, despite weak earnings season, the S&P 500 is up 3.6% since July 6. Other global indices have also rallied sharply with Stoxx up 6.2% and MSCI Asia Pacific ex Japan up 4.0%. TOPIX is down 2.6%.


Details of 2Q earnings results for S&P 500

A total of 456 firms in the S&P 500 have now released 2Q 2012 results representing 93% of the equity cap. Below we highlight our takeaways:

1. Sales disappointed. Realized sales are 2% lower than consensus estimates at the start of the season. 2Q2012 sales for S&P 500 (excluding Financials and Utilities) grew by 3% year over year.

2. Earnings in line with expectations. S&P 500 realized 2Q EPS is tracking at $25.49, a 2% positive surprise versus the consensus estimate at the start of reporting season. On a quarterly basis, 2Q2012 EPS will post year over year growth of 3% vs. 2Q2011. Telecommunication Services and Financials EPS grew by 26% and 14%, respectively. On a trailing four-quarter basis, 2Q2012 will establish a new EPS peak of $99.

3. Margins beat, but LTM margins are declining. With earnings beats and sales misses, 2Q quarterly margins are 20bp higher than expected (9.1% vs. 8.9%). Year over year, quarterly margins are flat to negative in most sectors. The trailing-four-quarter net margin for the S&P 500 is tracking at 8.8%.

4. Earnings expectations are falling and 3Q estimates imply no growth. The S&P 500 bottom-up consensus EPS estimate for 3Q fell 4% during the past five weeks and management guidance has been more negative than usual. Consensus expectations imply no earnings growth for the S&P 500 versus 3Q2011. Energy and Materials are the most significantly negative.

5. Over half of consensus 2012 EPS growth is from strong 4Q forecasts. 4Q earnings are expected to grow 15% versus 4Q2011, more than twice as fast as any other quarter. 4Q2011 growth was about half that of the other 2011 quarters, which explains some of the growth discrepancy between quarters in 2012. Analysts forecast a sudden jump in LTM margins to a new peak of 9.0% in 4Q2012 while we forecast further slippage to 8.7%.

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Ahmeexnal's picture

Banks preparing for global collapse:
Exclusive: U.S. banks told to make plans for preventing collapse

Crimedog's picture

ZOMG - time to panic!!!  Oh wait, this program was started in 2010.


I view that news as a good thing.  I would rather have the banks put forth some plan in case of an emergency rather than wing it like they did in 2008, which resulted in TARP.

Muppet of the Universe's picture

anyone else notice that ZH posters are basically little PPM nazis hyped up on alex jones and coolaid? 

I mean FFS, we all know the game doesnt go on forever, but you cannot expect to have ANY credibility,

after calling for the end every single day, and being wrong... every single day.


Zh posters are as brain dead as alex jones zombies.

Silver Bug's picture

Unless QE to infinity continues. Then we are in for a world of hurt. They have no choice.

razorthin's picture

These disasters have damaged banks' reputations, but not their balance sheets. Most are still profitable, and in recent years the five banks have improved their capital bases and liquidity.

Mark to model accounting (let's include the $trillions of off-balance sheet losses, shall we?), borrowing at 0% from the Fed to buy treasuries to keep the gov't profligacy going, and HFT front-running equity markets with 99.9% success.

A symbiotic bank-gov't relationship that is parasitic to the rest of us.

DeadFred's picture

As far as I've seen the actual plan they came up with has never been published.

Let me be the first: The Fed prints a whole lot of money and gives it to the big banks so they don't collapse. See the banks have it all worked out.

They forgot to put in a plan for a drought but you can't get everything right. A question I've not seen addressed so far, what happens if the rains don't return next year? It may have been a tactical mistake for them to take on the unofficial title of 'Master of the Universe', it may have provoked a response.

max2205's picture

Are we using the correct accounting system rules... Didn't think dance till you drop your pants....

Seasmoke's picture

hey it worked for Roger Staubach and Drew Pearson (although Pearson clearly shoved the Viking defender)

Daily Bail's picture


I must be getting old, because I actually remember the game you are talking about.

Anyway, this was some extremely funny shit from Romney's announcement earlier.

WATCH - Romney Accidentally Introduces Paul Ryan As 'The Next PRESIDENT Of The United States'
Hype Alert's picture

I must be older, because I don't.

Yen Cross's picture

 Q-2 earnings is probably not the best description, of the last 4 weeks.   I was thinking " Q-2 revenue misses" , with a sprinkle of Qe-squared [ ECB, Fed.] , " checks in the mail" talk.

Crimedog's picture

Keep downplaying the stock market, and I'll keep riding prices higher.  There is plenty of short interest which has started to cover which will push this thing higher in the next couple months.

hannah's picture

can you show everyone the numbers for this 'short interest' you claim will blast the market higher...?

Crimedog's picture

Sure.  Take a look here.  In the recent cycle up in short interest, it looks like the covering is just starting.  Can't really blame them.  Why short this market when the Fed is there to prop up any sudden drop in prices?

Yen Cross's picture

Crimedog      When you have a market approaching yearly highs, it's safe to assume there is selling intrest.

   I'm thinking about all those weak longs, that could generate a long covering rally.? Once the wave starts, it's run for cover!

  That reminds me of a tune from "Quiet Riot" , 80's metal band.

Tyler Durden's picture

Here is the actual NYSE data:

Crimedog's picture

This is more or less the same as the charts from Schaeffers.  The pattern really started in the past couple years.  2008 obviously did not follow this pattern, as the short interest peaked just before the market tanked.  Would have been nice to have been short there...

DeadFred's picture

The difference between Tyler's and Schaeffers's charts is interesting. Tyler's total NYSE data is significantly lower than Schaeffer's data for stocks that have options. The shorts aren't being cover as fast this year as they were last year as well. Perhaps last last year there wasn't an end of the year cliff coming up to make the shorts as confident.

Yen Cross's picture

I see a weak double top scenario, about to be broken!

Hype Alert's picture

That chart tells how hard it is to make any money on shorting.

Hype Alert's picture

With revenues missing by 60% of those reporting, the earnings going forward are going to be painful.  The labor costs have been cut to the bone and now it's time to start cutting muscle.

govttrader's picture

How much you wanna bet ES trades down to 1397 before the NY open?

ebworthen's picture

Oh Lord - we are going to have to endure the election and "black friday" and holiday commercials.

The "back to school" and GM commercials have been too much to bear already.


overbet's picture

thats simple, dont watch tv. mind candy rots your brain. 

marz929's picture

Who gives a shit. The money in your lousy accounts is not your anyway. It goes up and down but ultimately, if there is any problem at your financial instituion, it goes gone. Wake up:

q99x2's picture

Hail the Jobs Act.

Dollar Bill Hiccup's picture

What's really interesting is that the multiple expansion in the "S&P500" has been driven by wild expansion in the defensive / yield sectors.

As a result, the indices have levitated even while the cyclicals remain in the doldrums. A tale of two tapes, where equities are a surrogate now for yield.

When the juice hits, beta will be more than ready to fly, and it will have decent valuations to boot.

That's bizarro.

orangegeek's picture

Markets price in future potential.  The Dow looks like its ready to fall hard this week - nevermind Q4 earnings.  Volume is in the tank - buyers are leaving.


SP500 says pretty much the same.