So far, the first-quarter earnings season is trying to follow the same script that the market has followed for years … but this time, things aren’t going according to plan, and a host of blue chips are gliding under the limbo pole as a result.
The usual plan: Early optimism gives way to dramatically lowered expectations, managed down by cautious corporate guidance and estimate cuts by analysts. But this lowered bar is then magically exceeded thanks to earnings manipulation (loan loss reserve releases by banks being the largest culprit), investors celebrate, and the cycle repeats.
But this time …
While two-thirds of S&P 500 companies that have reported earnings have beat expectations, more than half have missed revenue estimates. Sales is much, much harder measure for companies to tweak because of the way accounting law works. This is a sign that the overall economy is in a bit of a rough patch — something corroborated by a drop in the Citigroup Economic Surprise index (PDF) to a low not seen since mid-2012.
We’re also seeing a number of notable earnings disappointments in big-name blue chips.
Here are five that have fallen short:
Disappointing Blue Chips: Google (GOOG)
Given the recent pressure that tech blue chips have been under lately — with the Nasdaq Composite touching its 200-day moving average on April 15 for the first time since late 2012 — investors were none too pleased with the results from Google (GOOG).
Namely, Google posted top- and bottom-line misses driven by a 9% year-over-year drop in the cost-per-click of its web ads.
Overall operation expenses jumped as well, to 35% of revenue from 31% of revenue in the first quarter of 2013.
GOOG stock dropped 3.8% on April 17 in response.
Disappointing Blue Chips: IBM (IBM)
Click to Enlarge IBM (IBM) joined the parade of sadness in blue chips, reporting a revenue miss as Big Blue’s business in emerging-market economies was hit by currency turmoil in January and February, as well as an ongoing slowdown in places like China. Sales dropped 4% over last year.
Moreover, its guidance was affected by a more favorable tax rate that put the quality of its estimated figures in question.
ISI Group analysts reiterated their cautious rating on IBM stock in response, noting the company’s management isn’t doing enough to create leadership positions in areas of big tech innovation including cloud computing and software-as-a-service.
IBM stock gapped down 3.3% on April 17 in response.
Disappointing Blue Chips: JPMorgan Chase (JPM)
Earnings dropped 19% year-over-year as the release of loan loss reserves (a favorite big bank earnings trick) couldn’t overcome a drop in revenue from bond trading and a huge drop in mortgage originations.
JPM stock dropped hard in response and is hugging their 200-day moving average for the first time since October.
Disappointing Blue Chips: Bank of America (BAC)
Click to Enlarge Another failure on the part of bank blue chips: Bank of America (BAC) unexpectedly posted an outright loss in the first quarter of 5 cents per share, 10 cents below the result Wall Street expected. Revenues dropped 2.7% over last year. The result was driven by legal expenses as the company makes amends for its housing-bubble-era no-nos as well as a smaller release of loan loss reserves.
BAC stock continued the slide it has been suffering since mid-March, as its 20-day moving average makes a downward cross of its 50-day average for the first time since September.
Disappointing Blue Chips: Chipotle Mexican Grill (CMG)
This might not seem like a big deal, but with food price inflation bubbling up across the economy due to drought conditions, the smallest cattle herd in decades and the ongoing push of stimulus from the Federal Reserve, CMG’s margins should remain under pressure — deflating another one of the market’s momentum favorites.
CMG stock posted a massive 12.5% intraday reversal on April 17 to finish with a 5.9% loss.