We know top-line numbers were a disappointment in Q2; but the long-only AUM-defending commission-takers will remind you that 'stocks are cheap', '...valuation...', 'money on the the sidelines', and on the surface there was a 6.9% increase in EPS from Q2 2011 (growthy and as UBS notes - anything but anemic). But, like every good story, the truth is darker under the surface; looking at earnings growth (i.e., without the impact of shrinking share counts) excluding prior-period Financial sector writedowns, we see an outright earnings contraction. Further, consensus estimates are calling for EPS growth to go negative in 3Q12 - falling to $25.07 from $25.65 - which will make two quarters in a row of negative earnings growth - what we would consider an earnings recession.
UBS: The Q2 Growth Mirage
With results for 494 companies in the books, it appears 2Q EPS for the S&P 500 will come in at $25.80 — roughly in line with our $25.75 estimate. On the surface, this represents a 6.9% increase from 2Q11 — a growth rate that is anything but anemic. However, looking at earnings growth (i.e., without the impact of shrinking share counts) excluding prior-period Financial sector writedowns, we see an outright earnings contraction.
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More specifically, earnings for the S&P 500 ex-Financials declined by 1.5% (table above), while revenues were down 0.2%. Notably, we exclude Financials because the sector’s results are often skewed by one-time items and debt valuation adjustments, which mask the broader earnings trend. For instance, Bank of America’s Countrywide write-off reduced EPS for the overall S&P 500 by $1.30 (i.e., 5.1%) in 2Q11, thereby overstating 2Q12 earnings strength.
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Further, consensus estimates are calling for EPS growth to go negative in 3Q12 — falling to $25.07 from $25.65. The chart above, which highlights the earnings growth of the S&P 500 ex-Financials (excluding buybacks), shows that we now have two quarters in a row of negative earnings growth — what we would consider an earnings recession.