) 'unofficially' kicks off the fourth quarter earnings season
after the close today and it promises to be a less than inspiring
reporting cycle. Total earnings for companies in the S&P 500
are expected to be flat this quarter from the same period last
year, roughly similar to the flat growth finish in the third
quarter. But with macro issues, ranging from the 'Fiscal Cliff'
and the Fed to the outlook for Europe and China, occupying
investors' attention, it isn't clear at this stage if the
deteriorating earnings picture will finally get the spotlight
that it deserves.
Expectations have come down significantly enough for the
fourth quarter that actual results are unlikely to be worse than
what we experienced in the third quarter. Even the flat earnings
growth expected this quarter is better than the negative earnings
growth that was expected for the third quarter at the start of
that earnings season. In the end, third quarter earnings were a
lot less negative (down only -0.1%), but that was a sharp
contrast to the positive earnings growth performance quarter
after quarter since 2009. Importantly, as the third quarter
reporting season was getting underway, consensus estimates for
the fourth quarter looked for earnings growth in excess of +7%.
The drumbeat of negative guidance on the third quarter earnings
calls brought down that growth expectation from +7% to the
current +0.4%. As is typically the case each quarter, most
companies will likely come ahead of these lowered
Guidance from management teams on the earnings conference
calls is always very important, but it will be even more critical
this earnings season. In the current post-Reg FD environment,
company guidance has become the primary tool through which
managements anchor the market's expectations. And earnings
expectations for the coming quarters appear unusually optimistic
relative to what we have seen lately. Consensus estimates peg
earnings growth to ramp up from the flat-lined performance of the
second half of 2012 to a roughly +10% gain in 2013. 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.
We will know more in the coming days as the earnings picture
evolves. But all indications are that estimates need to come down
given the unsteady and weak state of the global economy. Revenue
growth and margin expansion are the primary avenues through which
earnings could grow. And both of those avenues have already
played out. The market hasn't been particularly concerned about
this issue thus far, but it is difficult to envision investors
shrugging lack of earnings growth for long.
figures are to be released today at 3:00 PM EST and are expected
to increase by $12 billion after increasing by $14.2 billion in
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