Article / 23 October 2012 at 9:11 GMT

S&P500 Earnings: Analysts cut growth outlook for 2012 and 2013

Strategist & Equity Analyst / Private
Denmark

Executive summary

  • Analysts expectations for growth fell to 6.7% since earnings season start
  • Consensus 2013E EPS growth is now down to 11%
  • Tech EPS got a hit last week on Google and Microsoft
  • Industrials are losing steadily but surely

 

I have written about how the current earnings season has progressed so far: revenue has been the most disappointing element with 59 percent of companies missing expectations. The earnings season will of course influence the mindset of analysts. How have they changed their estimates since it began?

In Table 1 I have lined up annual S&P500 EPS numbers. First I have the consensus in USD terms, where it was 3 months ago, and since the beginning of this earnings season. The next two columns show the changes in USD and percent respectively over 3 months and in the current season. Lastly in Table 1 is the annual growth rate implied by the numbers.

During the last 3 months, consensus EPS has declined 23c or 0.2% to USD 103.1 for 2012, while the downgrades for 2013 have been a bit harsher. For 2013, EPS has declined by USD1.53 or 1.3% to USD114.4.

 Table 1 SP500 earnings

The declining EPS changes the implied growth rates and now analysts expect earnings to grow 6.7%, down from 7.0% 3 months ago. 2013 EPS is expected to grow by 11%, down from 12.2% 3 months ago. Earnings in 2014 have been taken down in absolute EPS terms, but analysts have kept the growth rate at 11%.

Looking at the quarterly numbers in Table 2, it's clear that consensus EPS has declined over the last 3 months, but perhaps the analysts went too far: EPS has risen USD 0.10 since the season began. Overall, analysts have lowered the coming earnings quarters by 0.6-0.7 percent. Analysts are therefore not changing their big picture, and this does not bode well for the upside of the S&P500 index. Investors will need to have their optimism reinforced, or the markets will become too stretched.

 Table 2 SP500 Quarterly Earnings

The tendencies from table 2 are also reflected in chart 1 where the historical quarterly EPS development is depicted.

 Chart SP500 quarterly earnings development

What is going on in the sectors?
In table 3 it is clear that the losers in the current season have been IT (NYSEARCA:XLK), Materials (NYSEARCA:XLB) and Industrials (NYSEARCA:XLI) with downgrades in the size of 3.1 to 2.0%. Materials have continued a very significant deterioration which began months ago, while IT and industrials downgrades are more or less in seasonal changes.

SP500 sector earnings

In chart 2 and 3 earnings expectations for the current year are shown. IT has had a knock on the jaw last week after Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT).

Tech stocks

Industrials are more in a grinding negative overall mood dragging expectations lower and lower.

Industrials 

Conclusion
Overall the current earnings season has improved a bit since it began, but the overall picture is still dire as revenues keep disappointing. Tech, Materials and Industrials are losing out and IT has taken a hit. 

Read also my pre-season article, The S&P 500 earnings season starts today: A Helicopter View or the first analysis in S&P500 Q3 earnings: Dour tone despite positive EPS surprise.

In connection with some sectors I mention specific ETF's as possible investment vehicles. These are just examples and the references should not be seen as endorsements of the particular ETF's.
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I plan to publish several more articles about the Q3 earnings season over the next three to four weeks.  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.

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