With just a quick glance, the third-quarter earnings season appears to be proceeding as most other recent ones have: The bulk of the (lower) adjusted estimates are being met, companies are painting their typical obligatory rosy pictures, and traders are making the usual buys and sells with a knee-jerk response to earnings announcements.
Q3 is different than prior ones where it counts, though … and that should scare the daylights out of all of us.
The Good News
As of late last week, 115 of the S&P 500’s constituents have posted last quarter’s numbers. So far, 59% of them have topped estimates, and 27% of them fell short. That’s shy of the usual “beat” reading of around 70%, and worse than the normal “miss” rate of 20%. But, with less than half the companies having reported, it might be a tad soon to jump to conclusions. Besides, we’re still seeing more beats than misses.
The results so far also put the S&P 500 on pace to earn $24.85 per share, which actually is a bit better than analyst forecasts from early October that suggested the index was on pace to only earn $24.70 in the third quarter.
Unfortunately, that’s about the only positive spin that can be applied to Q3’s earnings season to-date.
The Bad News
Were it just a handful of highly watched companies that were missing estimates, it might be dismissible. Likewise, if it were just some of the obscure, smaller names in the S&P 500 that were falling short, that also might be easy to overlook. It’s not just the minor names that are missing estimates, though, and far too many mega-cap stocks have already dropped bombs on investors.
Just to play catch-up, Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), McDonald’s (NYSE:MCD), Philip Morris (NYSE:PM), and Coca-Cola (NYSE:KO) are just five of the S&P 500’s 31 companies that have missed third-quarter estimates so far, yet those five companies alone made up 7% of the entire S&P 500’s forecast Q3 earnings.
We’ve yet to hear from Apple (NASDAQ:AAPL), Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), which together account for about 10% of the S&P 500’s typical earnings. The two energy giants are 50/50 propositions when it comes to topping or missing estimates. Apple, though almost always good for a “beat,” fell short of earnings forecasts last quarter, and considering how crimped its supply of the new iPhones was when they debuted, one has to wonder whether Apple is going to come up short just because it couldn’t get the new device in consumers’ hands when consumers wanted them the most.
Bluntly, though, a slew of earnings misses isn’t even the scariest aspect of the Q3 earnings season so far; there’s always a chance that analysts were simply throwing darts.
Perhaps more alarming is that Q3’s earnings for the S&P 500’s companies that have already reported are off by an average of 4.6%. That’s worse than the initial projection for a 2.3% decline in year-over-year incomes. Among the worst of the worst offenders are Advanced Micro Devices (NYSE:AMD), Red Hat (NYSE:RHT), Walgreen (NYSE:WAG), Charles Schwab (NYSE:SCHW), Nike (NYSE:NKE) and Intel (NASDAQ:INTC), all of which saw double-digit dips in year-over-year operating income.
All told, even though the S&P 500 might post better earnings than the original pre-earnings season outlook of $24.70, the operating profit of $24.85 per share it is on pace to generate remains shy of Q3 2011’s $25.29 — the first time year-over-year profits will have dipped since early 2009.
It Gets Worse
As any seasoned veteran can attest, one bad quarter doesn’t start (or stop) a trend, so remaining at least cautiously optimistic here about Q4’s potential isn’t completely without merit.
Unfortunately, an uncomfortable number of the market’s most important companies also dialed down quarterly or full-year outlooks, either on the profit front or the revenue front, if not both.
That group includes (but is not limited to) Advanced Micro Devices, Intel, Honeywell (NYSE:HON), Alcoa (NYSE:AA) (not an S&P 500 constituent, but still a key barometer), Danaher (NYSE:DHR), Caterpillar (NYSE:CAT) and Monsanto (NYSE:MON).
Companies miss estimates — that’s nothing new. It’s also nothing new to see a company whittle down its forecast sales and earnings. Not every company is going to be able to inflate year-over-year earnings in every single quarter either. None of those alone are the alarming part about Q3’s results.
What’s alarming here is the sheer number of companies that have fallen short of estimates and the number of companies that have lowered guidance and the number of companies that lost ground on the earnings front. Too many of them are also some of the market’s most reliable blue chips, and the brewing storm doesn’t seen to have spared any particular sector.
If it feels like there are a few more red flags than usual waving here in the thick of third-quarter earnings season, you’re not crazy.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.