One can stretch and spin the Q4 earnings reality to suit their particular sales pitch, or one can look at the facts. And the facts, as we first showed a week ago in "Q4 Earnings Season: Far Worse Than Most Suspect [3]", is that before the start of Q4 earnings, the S&P 500 was expected to make $25.51 in earnings. Three weeks later, after half the companies had reported, the number declined to $24.03, with some $9.70 of actual reported earnings and the balance estimated. Now, a week later, the latest revision shows even more deterioration in earnings, which with 66% of companies my market cap reporting are now just $23.48, 8% lower than the estimate at the start of earnings season, with under $10 of earnings left in estimated EPS and the balance already in the books. As Goldman explains what this means for earnings on a year over year basis: "Our interim revised 4Q 2012 EPS estimate is now $23.48 implying negative 1% growth versus 4Q 2011 ($23.73)."
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Another way of showing the transformation of Q4 from myth to reality: an inverse hockey stick as shown in the chart below, which also means that full year 2013 earnings will grind lower and lower as future optimism is also reacquainted with gravity.
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Ironically, with Q4 initially expected to be the best quarter of 2012 (as expected - after all it was the last quarter of the year and this the most back-end loaded), it ended up being the worst, with its $23.48 EPS set to be below the $24.24 in 1Q, $25.43 in 2Q, and $24.00 in 3Q.
The earnings reality is even uglier when one excludes core, unflinching staples such as utilities, and the "magical" earnings from the financials, the bulk of which is loan-loss reserve releases, one-time charges, non-recurring, non cash impairments, and other accounting gimmicks. When looking solely at the S&P ex Fins and Utilities, Q4 will post a whopping 4% decline in earnings year over year!
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But don't worry, the future is fantastic and earnings will soar, probably as a result of the payroll . At least that's what the always wrong sellside believes. This is the Q1-4 2013 earnings forecast was supposed to look a week ago when Goldman was still forecasting Y/Y growth in Q4 earnings. We now know that it will be a -1% drop.
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Some comments from GS on why Q4 is merely the latest earnings disappointment.
- Management guidance indicates downside to 2013 EPS. 73 companies with fiscal-year ends between November and January provided full-year 2013 guidance following their 4Q earnings announcements. 64% of firms have guided below consensus expectations, in-line with history (65%). The median company provided guidance 1% below consensus expectations.
- Bottom-up consensus full-year 2013 estimates are down 1% since the start of earnings season. Consensus forecasts S&P 500 EPS of $112 in 2013 implying 15% growth versus full-year 2012. Consensus lowered Health Care and Information Technology earnings estimates by 4% and 3%, respectively, since the start of earnings season.
- Using a mix of realized and consensus earnings, 4Q EPS is tracking 8% below the consensus estimate at the start of reporting season, $23.48 vs. $25.51.
- Accounting and definition differences have lowered index-level results. Results comparable to consensus analyst estimates may differ from the Standard & Poor’s definition due both to accounting differences and definitions of earnings from operations. These differences are usually small, but pension charges had a significant impact in 4Q.
And we are supposed to believe that these EPS, and cashflow-strapped companies are hiring left and right?