Fourth-quarter earnings season unofficially came to a close Tuesday when Wal-Mart Stores (NYSE:WMT) — the last Dow component to report — released its results. The world’s biggest retailer missed Wall Street’s income and revenue estimates and raised doubts about its future prospects. It was a fitting, emblematic end to a dreary reporting period.
Whether looking at top lines, bottom lines or corporate guidance, the fourth quarter of 2011 was the weakest earnings season in years — and yet it was better than expected, helping stocks remain buoyant.
Of the 404 companies in the S&P 500 that have released results so far, 64% reported earnings above analyst expectations — the lowest beat rate since the fourth quarter of 2008, according to data from Thomson Reuters.
More troubling, 26% of companies missed Wall Street estimates, while 10% of companies reported earnings in line with expectations. Over the past four quarters, 70% of companies beat estimates, 10% matched and 20% missed estimates, according to Thomson Reuters. That’s a huge deceleration from the hot streak of beat-and-raise quarters coming out of the recession.
Revenues were likewise disappointing. Only 56% of companies in the S&P 500 reported sales above analyst expectations, 0% reported revenues in line with analyst expectations, and 44% reported revenues below analyst expectations. Furthermore, in aggregate, companies reported revenues that were just 1% above estimates.
Keep in mind that that’s against a backdrop of analysts slashing estimates heading into earnings seasons, putting companies’ collective failure to beat greatly lowered expectations in even starker relief.
Guidance has also been weak — at least when companies have been brave enough to issue it. Only 86 of the S&P 500 companies that have reported so far offered an earnings forecast for the first quarter of 2012, according to data from S&P Capital IQ. Management hasn’t been this tight-lipped about future prospects since the third quarter of 2009. Typically, about a third of companies deliver quarterly earnings outlooks, according to S&P Capital IQ. So far this time, only about 20% have done so.
Moreover, the guidance that companies have been offering has been weak. In the S&P 500, there have been 57 negative earnings pre-announcements issued by corporations for first-quarter 2012, compared with 22 positive earnings pre-announcements, according to Thomson Reuters. That puts the negative-to-positive guidance ratio at 2.6 — worse than the long-term average of 2.3 and much more pessimistic than the year-ago figure of 1.8.
Yet the market hasn’t much cared. The S&P 500 is up 8% for the year, and the Dow Jones Industrial Average is flirting with the 13,000 level for the first time in almost four years.
What gives? Earnings and outlooks have been bad — but not nearly as bad as feared, says Jeffrey Kleintop, chief market strategist at LPL Financial.
“Stocks have been rising even as earnings estimates have been falling, and fourth-quarter earnings growth was the slowest it has been in years,” Kleintop writes in a note to clients. “Fading optimism of analysts and business leaders was offset by fading pessimism among individual investors. The explanation is that their expectations were much worse.”