Positive Start to Q4 Earnings Season - Earnings Trends
The fourth quarter earnings season has started on a relatively favorable note, perhaps indicating that expectations may have come down enough to make positive surprises easier to come by. And the Tiffany ( TIF ) and Aeropostale ( ARO ) news notwithstanding, we haven't seen that many negative pre-announcements either. But it's way too early to make any prediction at this stage as the bulk of the earnings season is ahead of us.
Total earnings for the 26 S&P 500 companies that have already reported results as of Thursday January 10th are up 4.7% from the same period last year, with 57.7% of the companies beating expectations with a median surprise of +1.4%. Revenues are up 3.5%, with 48% of the companies beating top-line expectations and a median revenue surprise of +0.3%. This is better than what this same group of companies did in the third quarter, when total earnings were down 5.9% and less than half of these 25 companies could beat earnings expectations.
Combining the few earnings reports that have come out with the bulk of the reports still to come, total fourth quarter earnings are expected to be up +0.5% 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.
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