On the surface, despite concerns about the adverse impact from the strong dollar and crashing energy earnings, so far the fourth quarter is shaping up quite strong. Indeed, as CNBC won't stop repeating, with 7% of the companies in the S&P 500 reporting actual results for Q4 to date, more companies are reporting both actual EPS above estimates (84%) and actual sales above estimates (60%) compared to recent historical averages. Of course, this only works courtesy of the endless guide-down game that analysts and corporate CFOs play year after year, in their appeal to gullible investors that companies are actually doing better than expected, as the following chart, courtesy of @Not_Jim_Cramer, shows, in which we can see that in Q1 2014 the S&P was expected to grow by 11.4%, a number which has plunged to just 3.5% currently
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However, where the fiction falls apart, is when moving away from this cherry-picked "bottoms-up" version of reality, where the sheer number of beats is supposed to give if not now extinct carbon-based traders, then at least algos a warm, fuzzy feeling.
What happens when one looks at earnings and revenues on a "top-down", consolidated basis? The answer, courtesy of Factset, is far less pleasant:
In aggregate, companies are reporting earnings and revenue below expectations to date. The aggregate dollar-level earnings reported by these 37 companies is 0.4% below the aggregate dollar-level earnings estimated for these 37 companies. The aggregate dollar-level revenue reported by these 37 companies is 1.2% below the aggregate dollar-level revenue estimated for these 37 companies.
As a result, even though more companies have beat earnings and revenue estimates to date than missed earnings and revenue estimates, the surprise percentage (which reflects the aggregate difference between actual results and estimated results) is negative for both earnings (-0.4%) and revenue (-1.2%).
This means that Q4 is shaping up as the worst quarter since 2012, perhaps even the start of the great financial crisis in 2008/2009.
The details reveals even more ugliness:
Due to companies missing earnings estimates in aggregate and analysts continuing to revise earnings estimates downward for companies yet to report, the blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for Q4 2014 is 0.6%, which is below the estimate of 1.7% at the end of the fourth quarter (December 31). At the sector level, the Telecom Services and Health Care sectors are expected to report the highest year-over-year growth in earnings, while the Energy sector is reporting the largest year-over-year decline in earnings.
Due to companies missing revenue estimates in aggregate and analysts continuing to revise revenue estimates downward for companies yet to report, the blended revenue growth rate for Q4 2014 is 0.8%, which is below the estimate of 1.1% at the end of the fourth quarter (December 31). At the sector level, the Health Care sector is expected to report the highest year-over-year growth in revenue, while the Energy sector is reporting the largest year-over-year decline in revenue.
It's not just plunging crude prices that are to blame:
Bank of America, Citigroup, and JPMorgan Chase all reported actual EPS numbers for the fourth quarter below the expectations of analysts. Bank of America reported actual EPS of $0.25, compared to the mean EPS estimate of $0.32. Citigroup reported actual EPS of $0.06, compared to the mean EPS estimate of $0.10. JPMorgan Chase reported actual EPS of $1.19, compared to the mean EPS estimate of $1.31. The last time all three companies reported actual EPS below the mean EPS estimate in the same quarter was Q4 2011.
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As a result, it now appears the Financials sector will likely report a year-over-year decline in earnings for the third time in the past four quarters.
Perhaps plunging FICC desk profitability is also impacted by the OPEC "supply glut", or whatever, just don't call it global deflation?
And speaking of crude, it appears that the "unambiguously good" crash in oil prices is finally becoming quite prominently bad, and since it can't be swept under the rug any more, will manifest itself in not only a major miss to aggregate Q4 earnings, but what now appears to be a decline in revenues, and soon, earnings in coming quarters and for all of 2015! From Factset:
For Q1 2015 and Q2 2015, analysts are currently predicting revenue growth rates of 0.3% and -0.3%. These revenue growth rates are also below the estimated growth rates of 1.6% and 1.0% for these same two quarters back on December 31.
For Q1 2015 and Q2 2015, analysts are currently predicting earnings growth rates of 1.8% and 3.2%, respectively. These earnings growth rates are below the estimated growth rates of 4.0% and 5.2%
We fully expect quarterly revenues and EPS in 2015 to not only end up missing expectations, but to also post negative prints Y/Y when the full collapse of the shale sector flows through the income statement some time in the current quarter, not to mention the already stark slowdown of the US export sector now that both Japan and Europe are engaging in unprecedented currency destruction which will lead to a depressed earnings (and revenue) state which will persist throughout the end of the year and certainly until the Fed admits the pipe dream about a rate hike was just that. But for now, this is how forward EPS are shaping up.
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As the chart above show, the drop in forward EPS - while still somewhat muted - has already suffered its biggest decline since Lehman. Should the current EPS stagnation persist, or worse accelerate, then it will be increasingly difficult to justify a bullish S&P growth thesis, based on multiple expansion alone.
As a final reminder, some time just before the Lehman failure, forward EPS were tracking at 100. A few months later the number dropped by 40%. So for all those who are using the current forward 12 month P/E ratio of 16.5x, a number which is well above the 5- and 10-year average forward PE of 13.6x and 14.1x as a benchmark for cheapness, be very careful.
Source: Factset [15] [15]
