Thursday, November 3, 2011

S&P 500 Revenues and Earnings

It has been a great earnings season. It’s not over yet, but of the 388 S&P 500 companies that have reported their Q3 results, earnings are up 22.9% on a 12.7% increase in revenues. The problem is that even as companies have provided lots of positive surprises, analysts have been cutting their earnings estimates for Q4 and all four quarters of 2012. That’s because they are turning increasingly cautious on the outlook for revenues and for the profit margin:

(1) Over the past four weeks, their 2012 estimate for S&P 500 revenues dropped 1.3% from $1097.16 per share to $1082.46. They now expect revenues to increase 4.0% y/y in 2012, down from 2011’s estimated growth rate of 9.8%.

(2) For 2012, the S&P 500’s profit margin--which we calculate by dividing analysts’ consensus expectations for operating earnings by expected revenues--slid from 10.2% nine weeks ago to a new low of 9.9% during the week of October 27.

(3) Among the 10 sectors of the S&P 500, there have been significant declines in consensus 2012 earnings forecasts in recent weeks for Financials, Telecommunication Services, Energy, and Materials. The other sectors have edged down too, with the exception of Health Care and Utilities, which have been relatively stable.

Why is there such a disconnect between the latest upbeat earnings results and analysts’ downbeat revisions for the coming quarters? They must be getting downward guidance from company managements. Yesterday’s FOMC statement notes that “there are significant downside risks to the economic outlook, including strains in global financial markets.” The Fed isn’t alone in lowering expectations for economic growth next year. October’s surveys of purchasing managers showed recessionary readings for the major economies of Europe. Company managements must be seeing a worrisome deterioration in the prospects for European economies and telling analysts to curb their enthusiasm about Q4 and 2012.

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