U-G-L-Y, Forecasts Got No Alibi, They’re UGLY!

Withering Q4 earnings expectations are eating away at the market

   
U-G-L-Y, Forecasts Got No Alibi, They’re UGLY!

Third-quarter earnings season is essentially a wrap, and, as is usually the case, it came in better than Wall Street expected — at least when it comes to bottom-line results. More important, however, was a shocking slowdown in revenue, and — most important of all — truly crummy profit outlooks.

The dramatic dropoff in future earnings expectations must be part of the recent market selloff. After all, traders and investors have known since at least August that this reporting period would end the market’s 11-quarter streak of earnings growth.

Besides — and this is critical — the market is forward-looking, meaning that third-quarter earnings are now very much in the rearview mirror. All anyone cares about is the current quarter and the beginning of 2013 — and that’s where things start to get a bit scary.

Heading into the trading week, of the 428 companies in the S&P 500 having reported earnings, 70% beat Wall Street estimates, according to FactSet data. That’s exactly par for the course, matching the average beat rate of the past four quarters. So no worries there.

Furthermore, aggregate earnings actually came in better than expected. Yes, they are on pace to contract for the first time in three years, but not by as much as analysts initially feared. The S&P 500 should post a profit decline of 0.1% — or essentially the same earnings as the year-ago period. That sight is far better than Wall Street’s expectations for earnings to drop more than 3%.

However, revenue was a disaster, hurt by Europe’s recession and a Chinese economy struggling to achieve even 7.5% GDP growth this year. Indeed, only 40% of S&P 500 companies have exceeded analysts’ average top-line forecast this earnings season.

How bad is that? Typically more than half of all companies beat Street sales estimates. With 60% missing forecasts, S&P 500 revenue is set to log its worst beat rate since the first quarter of 2009.

So while profit growth wasn’t as bad as feared, sales growth very much disappointed. The S&P 500 is on track to log a 1.2% drop in third-quarter revenue, worse than Street expectations for a decline of 0.4%.

But most troubling of all are the dour outlooks offered by corporate management teams. They are slashing profit and sales forecasts like mad. For the fourth quarter, 62 companies have cut their guidance, while only 24 have raised it. Analysts are naturally following suit, taking a hatchet to future earnings expectations.

Here’s a rundown of the carnage: Since Sept. 30, analysts have cut earnings growth expectations for the fourth quarter to to 5.6% from 9.3%; for the first quarter of 2013 to 3.4% from 5.3%; and for the second quarter of 2013 to 8% from 9.3%.

So, sure, worries about the fiscal cliff and uncertainty about the future course of capital-gains taxes are probably contributing to some of the recent selling — but don’t discount the rapidly deteriorating earnings picture.

After all, corporate profits are the ultimate arbiter of where share prices are headed. Meanwhile, earnings expectations have essentially been slashed in half during the past six weeks.

It would almost be more shocking if the market didn’t lose some bidders amid such a slowdown.


Article printed from InvestorPlace Media, http://investorplace.com/2012/11/u-g-l-y-forecasts-got-no-alibi-theyre-ugly/.

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