As Two Thirds Of Companies Report EPS In The Next 3 Weeks, Talk Of "Record Earnings" Is About To Hit Mute
Just like back in the first half of 2011, when GDP experienced a premature climax to coincide with the end of QE2, only to tumble promptly afterwards, so just as two thirds of the S&P by market cap prepare to announce earnings starting tomorrow, Q4 EPS forecasts have hit the lowest they have been at in the past 12 months. While the general economy has been lagging the contraction of Europe and Asia, yet finally hit a downward inflection following the disappointing data of the past week (more on that shortly, as we explain why with the Fed set to begin an easing bias in 10 days, all economic indicators are about to take a dive), it has been corporate results that have so far managed to keep the market afloat. This may be coming to an end, courtesy of a perfect storm of negative earnings preannouncements (which have soared to a ratio of 3.5x compared to positive ones; the highest since Q1 2008) together with outright coincident misses. Because as the chart below shows, at $24.09 and pointed decidedly downward, Q4 EPS and its transition to Q1 2012 does not portend anything good for the world economy or markets. In fact, with the EUR plunging, while the news is welcomed by German exports, the adverse impact to US companies, via FX losses and otherwise, is about to be unveiled.
Here is how earnings seasons is shaping up: the next three weeks are critical.
And why any talk of record corporate earnings is about to be muted for a long time.
here is Goldman's take on earnings:
We expect modest 1% upside to bottom-up consensus for 4Q S&P 500 earnings, and estimate beats for Telecom, Financials, and Info Tech, but lower profits for Energy, Materials, and Consumer Discretionary. We also expect the margin expansion cycle to end at 8.9%, flat on a trailing four quarter basis since 2Q. Consensus has cut estimates for 4Q 2011 and 2012 significantly since the summer despite stronger US economic data and the cyclical rally. Below-trend growth and Europe risk support selective cyclical exposure. ... Bottom-up consensus earnings estimates have been revised down ahead of earnings. While 4Q is typically the strongest quarter for earnings, estimates have fallen 9% since the summer and are now below both realized 2Q and 3Q results. This trend of revisions has existed since July, when weak US economic data along with concerns of recession in Europe and slow growth in Asia led analysts to lower estimates. Full year 2011 consensus EPS has been cut 3%, from $100 to the current $97, in line with our forecast.
And more importantly, on margins:
Our margin forecast is notably different from consensus. We expect LTM margins to be unchanged since 2Q at 8.9% (ex-Financials and Utilities) while consensus expects margins of 9.0%. The outlook for S&P margins explains the majority of our below-consensus earnings forecast. In 2012 we expect margins to fall slightly to 8.7% and S&P 500 earnings of $100 while consensus expects record 9.3% margins and $107 EPS.
Finally, this is what the next week looks like for reporting companies.
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