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Lea Jakobiak
As earnings season heats up, Jim Sinegal from Morningstar, says that so far results from the finance sector have been disappointing "because of the legal expenses big banks have to pay". He thinks Wells Fargo has "most potential going forward".
Article / 07 November 2012 at 8:46 GMT

SP&P500 growth under pressure as guidance is weak

Peter Bo Kiaer Peter Bo Kiaer
Strategist & Equity Analyst / Private
Denmark

Executive summary

  • Low guidance reduces 2013 estimates with growth seen at 10.1%
  • Q3-12 is revised up as EPS beats expectations
  • But Q4-12 is lowered accordingly
  • 2012 growth is currently still at 6.7%

The biggest change since my last update on earnings growth has been the decline in estimates for all of 2013. The growth rate has dropped from 11 percent to 10.1 percent. In comparison, when the earnings season began the growth rate was 11.9 percent, see table 1.

Revenues continue to come in on the low side of expectations and on top of this company guidance is on the dire side and has not been this negative since 1996 when my source began recording data.

S&P500 table of annual EPS

Under the surface of the unchanged growth of 6.7 percent for 2012 there are some bigger changes. Q3 EPS surprised to the upside and this has lifted expectations for the whole of Q3 from USD 25.0 to USD 25.6, see table 2. But the negative guidance has at the same time made analysts lower their expectations for Q4 with Q4 EPS having declined USD 0.8 to  USD 26.1 now.

S&P500 quarterly EPS

The negative guidance has not only had consequences for Q4 but it has also rubbed off on Q1-2013. In chart 1 you can see the dynamics between the quarters.

S&P500 graph on quarterly EPS

Sectors
What still stands out is the continuing deterioration of the Materials sector where earnings for 2012 have been reduced by 3.6 percent since the earnings season began. Revenues in Materials have missed by the widest margin of all sectors at -7.9 percent. Meanwhile, EPS has surprised by 0.5 percent, but this is due to cost cutting and makes analysts nervous. The tTopline has to grow otherwise an EPS beat is not worth much - certainly something to keep an eye on.

S&P500 sector annual earnings 2012

IT has been struggling for some time and it has not improved since I wrote about this sector last time. In general, IT companies have had problems in reaching expectations on both revenue and EPS and have left the sector under pressure. The IT sector has declined 5.9 percent while the S&P500 declined 1.5 percent, so quite an underperformance.

S&P500 IT EPS development

Industrials have struggled to live up to revenue expectations but earnings have surprised well. The season has so far resulted in 1.1 percent reduction in earnings expectations for 2012, see chart 3, but the sector index has risen 1.4 percent since the season began. More confidence from investors is apparently sneaking in.

S&P500 Industrials EPS development

Conclusion
The Q3 earnings season has so far been better than expected by analysts and it has taken the EPS estimate higher during the course of the season. Market sentiment is probably still glass half empty though as company guidance has been poor and this has rubbed off on Q4 and leaves the overall result for 2012 so far even. Then low guidance has convinced analysts to lower their estimates for 2013 and the growth expectation is now only at 10.1 percent.

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 misses are a big concern
  5. S&P500 Q3 revenue still struggling; Q4 guidance is negative

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