While everyone's attention is focused on the earnings deluge set to be unleashed in the third quarter (and if the handful of companies reporting so far is any indication, this may be one of those quarters when companies underperform already drastically lowered EPS estimates, which at last check are set to tumble -5.5% Y/Y according to consensus), the big surprise is what has quietly taken place to Q4 consensus estimates.
First, a reminder of where Q3 stands from FactSet [6].
At the start of the peak weeks of the Q3 2015 earnings season, the blended earnings decline for the third quarter stands at -5.5%. Factoring in the average improvement in earnings growth during a typical earnings season due to upside earnings surprises (see page 2 for more details), it still appears likely the S&P 500 will report a year-over-year decline in earnings for the third quarter. If the index does report a year-over-year decline in earnings for the third quarter, it will mark the first time the index has reported two consecutive quarters of year-over-year declines in earnings since Q2 2009 and Q3 2009.
Actually, make that three quarters in a row, because as of this past week, EPS in the fourth quarter, which on June 30 were triumphantly expected to post a solid 4.3% rebound, went from +0.2% to negative 0.4%.
Looking at the current quarter (Q4 2015), what are analyst expectations for year-over-year earnings? Do analysts believe earnings will decline in the fourth quarter also? The answer is yes. This past week marked a change in the aggregate expectations of analysts from flat year-over-year earnings (0%) for Q4 2015 to a decline in year-over-year earnings for Q4 2015. However, expectations for earnings growth for Q4 2015 have been falling not only over the past few weeks, but also over the past few months. On June 30, the estimated earnings growth rate for Q4 2015 was 4.3%. By September 30, the estimated growth rate had declined to 0.2%. Today, it stands at -0.4%.
The following chart shows the trajectory of Q4 consensus EPS growth, or rather as of October 9 when it just turned negative, decline:
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This is nothing more than the well-documented sellside overoptimism, aka the spread between the "soft dollars" optimism (because banks are only paid for their optimism never for their skepticism), and reality. It is also shown in the "fishhook" chart below from Deutsche Bank.
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This is turn takes us back to a post we did three weeks ago, in which we laid out the truth about S&P earnings which few have dared to mention, namely that there is now "no earnings growth for 7 quarters (with a revenue recession on top [9])"
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It is time to revise this chart because as a result of the decline in both Q4 2015 and inevitable drop in Q1 2016 EPS, we are on the verge of having not seven but eight quarters, or two straight years without an increase in S&P earnings - something that has never happened outside of a recession!
So what is the good news? Well, in order to save their optimistic year-end price targets if not so much for 2015 then for 2016, analysts have to predict what EPS will be in the 4 quarters of 2016.
This is what FactSet says: "it is interesting to note that analysts in aggregate do expect earnings growth to return for all
quarters in 2016. Please see the chart on page 5 for more details."
That's right, after two years of stagnant earnings, and three straight quarters of declining quarterly EPS, the sellside community now expects a dramatic surge in 2016 EPS, which after rising 4.9% and 7% in Q1 and Q2, is expected to literally soar in Q3 and Q4 by 14.7% and 14.1%
Behold:
While we appreciate Factset's wry (or dry) humor, we would replace "interesting" in the bolded sentence above with "absolutely comic", because as DB further notes, the only way earnings soar as much as they do in 2016 is for the energy sector to do a full U-turn, which in turn will only happen if oil manages to storm higher from its current price in the mid-$40s to a price double that, somewhere north of $80.
Then again, if and when all central banks engage in the final act of monetary desperation - a necessary and sufficient condition for a commodity price supernova - it is quite possible that oil will in fact rise to $80, maybe even $800. However, for anyone using an "all else equal" approach to forecasting, we would suggest that expecting a 14% annual increase in earnings in the second half of 2015 is just not going to happen. In fact, just the opposite is likely to happen considering the biggest, and long overdue, GDP-crushing inventory liquidation/repricing in US history looming [11]just around the corner.
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Source: Factset [6] [6]