The decoupling between revenues and earnings (that we discussed here [6]) continues and while we have seen analyst reduce estimates, Nic Colas of ConvergEX notes that the estimates for the upcoming quarters of 2012 and into next year have taken a disturbing turn for the worse. On average, the Street expects the 30 companies of the Dow to post only 1.0-1.5% year-over-year top line growth for Q3 2012, down from the 3.0-3.7% expectations it had baked into its financial models just 60 days ago. Also, these analysts now peg Q4 2012 at 3.9% growth, but those numbers are falling quickly as companies report their earnings this month. Also worrisome: analysts are reducing their revenue expectations across the board – only 3 of the Dow 30 companies saw increased expectations for Q3 2012 revenues in the past 30 days, with a similarly dismal count for Q4 2012 expectations. If this is the best these large, well-capitalized companies can muster in terms of sales growth, can a U.S. recession be far behind?
Nicholas Colas, ConvergEx: Skinny Love - Analyst' Revenue Estimates Signal Recession
We have been tracking what brokerage analysts publish as their revenue estimates for the 30 companies of the Dow Jones Industrial Average for the last three years, with an eye to tracking of how changing market perceptions of macroeconomic conditions alter their expectations for top line growth. As you would expect, revenue estimates for the back half of 2012 have been slowly working their way lower this year. As the numerous charts and tables after this report show, analysts started off 2012 thinking that Q3 and Q4 would average about 4-6% revenue growth for the Dow companies. By April, they began to grow a bit concerned, nibbling away at Q3 revenue estimates but leaving Q4 numbers largely unchanged. In May and June they started to ratchet back expectations more aggressively, to something more like 2-3% for Q3 and 4-5% for the final quarter of the year.
[7]
This trend, however, has accelerated to the downside over the past 30 days and we are fast approaching levels where these estimates are unambiguously pointing to the risk of a U.S./global recession later in 2012 and into 2013. Some specifics here:
- For the third quarter of 2012, the analysts that cover the Dow stocks expect to see only 1.0 – 1.5% year-on-year top line growth for the overall index and the non-financial names, respectively. That will be the worst comparison since the Financial Crisis, and show sequential deceleration/stagnancy from Q2 2012’s expected 3.2% comp overall and 1.5% comparison for the non-financial names.
- Analysts are still holding out some hope for Q4, but I can tell you from years of experience doing such models that this is probably because they do not want to reduce their full-year earnings estimates just yet. Right now, Wall Street models show an expected 3.9% year-over-year revenue comparison for the fourth quarter, but I doubt any analyst could defend this point of view unless they expect a rapidly weakening dollar (most of these companies have large overseas operations) or a truly epic round of liquidity-pumping operations from the world’s central banks.
- What is also notable is that the cuts in expectations over the past 30 days have been widespread. Analysts are only marginally more bullish on 3 names of the Dow 30 for the back half of the year, and the increases in revenue growth here is miniscule.
The logical question from all this data is simple – why are stocks going up even as analysts cut their financial outlooks? June and July have been decent months for the broad indices, and this flies in the face of the consistently reduced expectations I note here. There is, of course, the notion that the sell side is always late to the party and investors factored in a weak back half during the pullback from April to early June. Fair enough. What is troubling to me, however, is how close to the edge of an implied global recession we seem to be skating with these most recent estimates. If inflation is running around 2%, a 1% increase in revenues means a negative 1% growth rate for units sold, assuming constant mix. That leaves the very real possibility of recession on the table, almost certainly in Europe and quite possibly in the United States.
[8]
That leaves expectations for further monetary policy as the last-and-best explanation for the recent rally in U.S. stocks. When corporations feel the pinch from a slower economy, they lay off workers. When they lay off workers, the Fed executes on its dual mandate and increases liquidity. And when the Fed increases liquidity, stocks go up. Yes, I know it sounds like one of those ads for satellite TV, but this does explain the market’s behavior of late. And it fits with the data presented here.