Tuesday, November 1, 2011

S&P 500 Earnings

There were a few tricks in Q3 earnings, but most earnings reports were a treat. So it was another great quarter for earnings. Q3 is shaping up to be the eighth quarter in a row of double- or triple-digit earnings growth. As of October 28, the actual/estimated blended growth rate was 16.3% y/y. For the 330 S&P 500 companies that reported so far, the average earnings growth rate is 24.1%.

That’s the good news. Not so good is that while Q3 is beating the consensus analysts’ expectations at the start of the earnings season for the eleventh quarter in a row, the analysts continue to lower their Q4 and 2012 estimates. They must be getting quite a bit of downbeat guidance from company managements that’s more than offsetting the upbeat Q3 surprises. Let’s review the latest earnings data:

(1) Q4 expectations continue to slide. During economic expansions, the fourth quarter tends to be the best of the four quarters for earnings. So, it’s worth noting that while Q3 earnings are beating consensus expectations for the quarter, analysts lowered their Q4 estimate for the thirteenth week in a row to slightly below the latest actual/estimated number for Q3. Q4’s growth rate is now expected to be 11.5% y/y, down from a peak estimate of 18.5% during the week of June 3 of this year.

(2) Expectations for 2012 are also on a slippery slope. The consensus for next year’s S&P 500 operating earnings fell to $108.45 at the end of October from a peak of $113.83 during the week of August 5. Joe and I expect it will fall to $100 by the end of this year, and that it will be the actual outcome in 2012.

(3) Forward earnings are starting to trace a square root. When we do our P/E x E analysis of the stock market, we use forward earnings, which is the time-weighted average of the current and coming year estimates. During 2009 and 2010, there was a V-shaped recovery in forward earnings, as we predicted. We’ve been curbing our enthusiasm for earnings in recent months. We were too cautious on Q3, which beat our expectations significantly. However, forward earnings have flattened out over the past 15 weeks. The V-shaped recovery may be turning into a square-root pattern.

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