With the S&P 500 once again testing multi-year highs, forward P/Es over 14 in a real-rate environment which suggests single-digit P/Es [5], abnormal micro-structure [6] (mega-caps outperforming and high-beta fading in an up-tape), and a buy-the-f$$king-'dream' mentality soaking in everywhere, we take a close-up view of the earnings season reality that is about to come crashing down on multiple-expansion hopes. Following on from the five most ridiculous charts in US equity markets [7], these five 'facts' will be assuaged by every long-only manager as 'priced-in' - we suspect otherwise.
[8]
- Downward EPS revisions have outnumbered upward revisions for 22 weeks
- For the S&P 500 companies, there have been 91 negative pre-announcements versus 21 positive
- The 4.3x negative-to-positive pre-announcement ratio is the highest since 2001
- Of the S&P 500 companies that have reported thus far (25 total), only 52% have exceeded expectations (long-term average is 63% and last four quarters average 67%)
- Overall Q3 earnings are expected to fall 2.5%
And as a reminder - Via Citi:
When investors consider the earnings expectations for the next several quarters, it must be noted that a few sectors seem to have an abundance of optimism that may or may not be warranted. For example, the Materials sector is showing a big bounce in 1H13 earnings projections that may require much more clarity on global economic reacceleration, while Financials are expected to rise sharply as well. Hence, these two areas might require some ratcheting down of forecasts and management teams may begin to do so in the next few weeks.
We have highlighted some of current measures of complacency, which may not be entirely appropriate in the very near term (next couple of months) given the US elections and the related fiscal cliff, recent European social unrest and the need to curtail some of the profit growth enthusiasm. In the medium term (2013), many of the analytical models we use still argue for overall market gains, and thus we believe weakness should be seen as a buying opportunity.
(h/t @Not_Jim_Cramer)