Q2 2012 reporting season: First earnings miss since late 2010?

The S&P 500 took a 10 percent hit from this year's high in early April as the issues in the Eurozone entered investors' consciousness again and important economic indicators such as manufacturing PMIs showed weakness. In line with the share price declines Wall Street analysts revised down their 12-month forward EPS estimates. As the chart below shows, the S&P 500 has regained some of its lost terrain and with it 12-month forward EPS estimates have climbed to the highest levels since early 2006. This translate into a forward P/E of 12.4 and should sentiment shift to the more positive again (say back to 13 times forward expected earnings) then the S&P 500 should trade close to 1,430 which in that case would be the highest level this year.

Rising earnings estimates reflect optimism among analysts but this also increases the probability that companies will miss estimates in aggregate terms. The earnings surprise, as the chart below shows, has steadily decreased since mid-2009 and has only only showed one negative surprise in fourth quarter of 2010 since the global economy came out of its contraction. Ahead of the earnings season several companies have missed estimates both in the US and Asia. With this in mind, weak economic indicators in Q2 and all-time-high forward earnings estimates this earnings season could very well translate into the first earnings miss since Q4 2010.

The first week of the earnings season is always light in terms of numbers of earnings releases and their impact. But three companies will be watched more carefully:

• Alcoa starts Monday with its second quarter release with consensus looking for earnings of 6 cents per share, down 81 percent from last year. The recent weakening of global PMIs has caused analysts to reduce their EPS estimates by 47 percent in the last three months. With aluminum prices down 9.5 percent the last three months it seems analysts have overshot on Alcoa's earnings excluding extraordinary items unless volume declined significantly in the second quarter.
• On Friday, Wells Fargo (WFC) and J.P. Morgan Chase (JPM) start the earnings season for financials and the focus will be intense on JPM as the earnings release will be scrutinised for further information on the bank's trading loss related to credit derivatives. The Street is looking for JPM to deliver EPS of 0.78 down 36 percent from three months ago as the trading loss will be a significant negative on the bank's bottom line despite it having tried to offset some of this with realised profis from other available-for-sale investments; not activated on the income statement before realisation of profit or loss. WFC will likely deliver solid numbers, as it always does. What's interesting to watch for are the bank's comments on credit and mortgages which are key to understanding whether we might see further improvement in the US housing sector. Wall Street is looking for EPS of 0.81 with estimates up 1 percent from three months ago.

Read the full earnings release publication with all earnings releases  and estimates in the attached PDF.