We have already noted the ongoing second consecutive quarter deterioration in corporate revenues [9]. Luckily, thanks to the ongoing barrage of levered stock buybacks, GAAP EPS have disconnected from the revenue reality and this earnings season have been largely in line, and even tracking a little bit better than expected. Or have they? As Goldman shows, the average positive earnings surprise is currently running at 43% which however is worse than the 10 year average.
[10]
The first big footnote here is the abnormally positive contribution of earnings from banks and other financials which are expected to post 33% earnings growth compared to 3% for the entire S&P 500: nearly 70% of financial firms have beat consensus earnings by more than 1 standard deviation. This is thanks to not reporting the big hit on Available For Sales securities which do not impact Net Income but certainly hit Comprehensive Income and retained earnings. The impact of this accounting fudge was shown most visibly in the "earnings" of Bank of America which woul dhave otherwise had a Q2 loss instead of a profit as reported previously [11].
it also means that ex-financials, the positive beat would have been a far more modest 35% which is at the lower bound of the above earnings beat chart.
[12]
It gets worse: Goldman also observes that some $0.55 per share will be due solely to "accounting differences", to wit: "We estimate accounting differences add about $0.55 to consensus 2Q estimates. Differences between bottom-up consensus and Standard & Poor’s operating EPS methodology affect Health Care and Information Technology the most. Purchase accounting differences in Health Care raise the consensus estimate by $0.30, and the exclusion of employee stock option expenses in Information Technology increases consensus EPS by $0.25."
[13]
But even if the market is "happy" with the so far released Q2 earnings, and it appears to be judging by the fresh record high in the S&P despite today's double whammy of MCD missing both revenues and earnings, and the decline and miss in existing home sales all leading to a "1700 or bust" sign planted firmly on today's closing print, the question now is what lies in store (no pun intended) for the second half based on the companies' own guidance for the future?
The chart below shows just that: it also shows that optimism for corporate earnings (ignoring the persistent optimism in the economy which always without fail, leaves everyone disappointed despite the fifth ongoing year of QE) is once again misplaced and that EPS are set to disappoint, especially if the stock buyback wave - certainly not facilitated by the rise in interest rates - is finally over.
[14]
So what is a GETCO HFT algo to do with all of the above information? Why, BTFD of course.