The fourth quarter earnings season has started on a positive
note, as this morning's report from
) and Tuesday's results from
) show. This is a more reassuring start than what we saw at this
stage in the preceding quarter, perhaps indicating that
expectations may have come down enough to make positive surprises
easier to reach this reporting season. But it's way too early to
make even that modest prediction at this stage, as the bulk of
the earnings season is ahead of us.
Total earnings are expected to be up +0.5% in the fourth quarter
from the same period last year. This is a sharp drop from the
+7.9% growth expected in the quarter in late September, just
before the third quarter earnings season was getting underway. As
was the case in the third quarter (and practically every quarter
before that), the actual growth rate will most likely be better
than these pre-season expectations, given management teams'
mastery of under-promising and over-delivering.
Ahead of the third quarter reporting season, the expectation was
for earnings in that quarter to be down -3.4%. While the actual
earnings drop turned out to be 'only' -0.1%, it was nevertheless
the weakest earnings growth rate in almost 12 quarters. And if
the magnitude of outperformance in the fourth quarter is
comparable to the last four quarters, then the final growth tally
should be in the +2% vicinity. This would mean that corporate
earnings were essentially flat in the second half of 2012.
But this sub-par earnings growth trend is not expected to last
long, or at least that's what current consensus expectations
mean. After another quarter of weak results in the first quarter
of 2013, earnings growth resumes in the following quarter and
ramps up materially in the back half of 2013. I have been
skeptical of those growth expectations for a while now, but
that's exactly what the market is pricing at present.
Management guidance on the earnings conference calls is always
very important, but it will be far more critical this earnings
season. Guidance from management teams would frame expectations
for the coming quarters. Whether those expectations will hold or
come down will depend to a large extent on how management teams
describe business conditions on the fourth quarter earnings calls
in the coming days.
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