S&P500 Q3 revenues still struggling; Q4 guidance is negative

• S&P revenues continue to struggle, missing expectations by 0.7%
• After reporting, company shares have fallen an average of 0.5%
• Consumer staples companies barely reaching par; consumers under strain
• Company Q4 guidance is very negative

The earnings season is well under way, and companies representing more than 75% of the S&P 500 market cap had reported by end of last week. The overall take away is companies are still struggling to reach market expectations on revenue. Revenue has slipped 0.7% below expectations.

This is clearly a sign of weakness in the overall economy: not only in the USA, but globally. 

Revenues in the energy sector have moved into a positive average surprise after both Chesapeake Energy (NYSE:CHK) and ConocoPhillips (NYSE:COP) both had big revenue surprises. That said, earnings in the sector as a whole have not been able to crawl into positive surprise, as WPX Energy (NYSE:WPX) missed big time.

The second sector worth taking note of is Consumer Staples, as the overall picture here is worsening and revenues are trailing expectations by 1.7%, up from a slip of 1.2% the week before. Companies that provide the goods we more or less all need are struggling to hit just par. This points to continued strain on consumers. Be alert on Wednesday when reports come from Whole Foods (NASDAQ:WFM) and Mondelez International (NASDAQ:MDLZ) and keep an eye on Wal-Mart Stores (NYSE:WMT) reporting November 15. There seems a risk of revenue miss for these companies if they follow the recent trend.

IT has been struggling on revenue and the slip has worsened to 0.8%. Companies of interest would be Qualcomm on Wednesday and Cisco on November 13. Maybe they will be able to change the revenue picture for the IT sector.

Earnings
Overall earnings are in positive territory by 1.8%, but that number is misleading, as a few big surprises have influenced the overall reading. Earnings are also struggling to some extent.

Consumer Discretionary had a good row of earning surprises last week, with all 11 companies reporting better-than-expected earnings. Consumer Discretionary earnings reports are normally in the latter part of the season and this time is no different. If the positive tendency is kept up, then it could influence the overall tone, as we have relatively big companies reporting. This week: News Corp (NASDAQ: NWSA) on Tuesday, Walt Disney (NYSE:DIS) on Thursday. Next week: Home Depot (NYSE:HD) on Tuesday, Target (NYSE:TGT) on Thursday.

Energy might have surprised positively on revenues, but earnings are far behind, thanks to WPX Energy missing earnings by 945%. Taking WPX out of the equation, earnings are still trailing expectations by 5.1%. The release of quarterly reports from Marathon (NYSE:MRO) and Devon (NYSE:DVN) over the next few days will probably not be able to change the overall picture of a sector hit by lower prices and increasing exploration costs.

Materials have a level of earnings surprise of 126.6%, but this is caused by a beat of 3400% from United States Steel Corp. Without this big beat the surprise is at 0.7%.

In IT we have had AMD (NYSE:AMD) big miss a few weeks ago, as my colleague Matt Bolduc discussed in his article AMD's profit warning: a sign for the industry?  Electronic Arts (NASDAQ:EA), which may be for sale, wanted to create noise and missed big time. It helped drag the overall IT sector to a miss of 51.6%. Even peeling off the big misses, earnings are trailing expectations by 3.9% and therefore not living up to expectations.

Surprise matrix
From table 2 we can see that overall the levels are stable and revenue miss and beats are the same as last week. Overall, we can conclude that this reporting season has revealed that companies are having serious trouble getting enough turnover compared to what analysts had expected.

With employment not really picking up, there is a risk that this bleak picture will continue into Q4.

Investor reaction
Investors' overall reactions are also becoming rather stable, as the total number of Q3 earnings releases grows. When a company misses earnings, its stock price slips 2.3% relative to the S&500, see table 3. CEO’s EPS 101: Don’t miss!

CEOs are not getting kudos for growing revenues if this makes EPS slip below expectations. In the case of companies that beat revenue expectations but miss earnings expectations, investors have punished stocks with a decline of 1.6% relative to S&P500. Buyers are only endorsing companies where revenues and earnings both beat expectations. For companies that have manged to beat both, investors have lifted stock prices 1.9% relative to S&P500 in this earnings season so far.

Overall, investors have had somewhat higher expectations for this season than what they have seen, as stocks that have reported on average slipped 0.5% on their results relative to S&P500.  

Outlook
Companies beating or missing is important to investors, as we can see from the slipping stock prices revealed in table 3. Along with reporting earnings numbers, some companies provide guidance for the following quarter and the updated guidance from companies does leave scars. 

Looking at chart 1, we see that the share of companies guiding negatively is 77% and the reading has not been this negative since the data began in 1996. Notice that this covers Asian crisis in 1997/1998, IT bubble in 2001, the start of the current financial crisis 2008 and emergence of the European crisis in end of 2011. Companies are generally on “Warning” mode as the ratio of negative to positive guidance is on average 2.5 times and the ratio is at 4.8 times at the moment. The negative/positive outlook ratio was also very negative leading into Q3 and as we can see this has been a quarter below par. Q4 is looking even worse. Investors might already brace for companies struggling to meet expectations in next season unless expectations are brought down.

Conclusion
The season has been leaning to the negative side on revenues since the beginning of the earnings season, while EPS has managed to stay into positive territory. Investors were too positive going into the season, as we have seen prices slip versus S&P500. This is peculiar, as investors were warned before the season - the negative guidance ratio had not been as high since the IT bubble.

Looking ahead to the end of 2012 and with a continuing high level of negative guidance, investors should learn from Q3 and take prices into conservative territory, as there is an increasing risk that revenue and perhaps earnings will struggle in Q4.

Read also:

1. The S&P 500 earnings season starts today: A Helicopter View 
2. S&P500 Q3 earnings: Dour tone despite positive EPS surprise
3. S&P500 Earnings: Analysts cut growth outlook for 2012 and 2013
4. S&P500 Earnings: Companies revenue missses are a big concern

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I plan to publish several more articles about the Q3 earnings season.  If you would like to be notified by email whenever I publish these stories, become a member of TradingFloor.com and follow me or the topics of your choice. Joining TradingFloor.com is free, and you can sign in with Facebook, Twitter, LinkedIn or Google.