“Earnings for the S&P 500 are forecast to decline 1.2% in the first quarter, which would mark the first year-over-year decline since the third quarter of 2012. As of Dec. 31, analysts were estimating first-quarter earnings would grow 4.3%.” (FactSet)
But sluggish earnings growth over the past three years hasn’t held back stocks.
Earnings outlook is holding around its most pessimistic levels ever.
“93 out of the 111 companies in the S&P 500 that have issued an earnings outlook for the first quarter have guided below Wall Street’s consensus estimate. That’s the second-highest number of companies issuing warnings since FactSet began tracking guidance data in 2006. The highest number came just three months ago — for 2013’s fourth quarter.” (FactSet)
Executives love to low-ball estimates. They are going to great lengths to underpromise and manage expectations so they can deliver and beat consensus expectations. And this is probably wise since the market is pretty focused on ‘the beat-rate”. Despite the negative outlook the market has reacted positively.
Much is expected from corporate profit margins.
“Profit margins for the broad market and most sectors stand at record high levels. Managements have been struggling to maintain current margins, a point that was made abundantly clear on the recent quarterly conference calls.” (Goldman Sachs)
“We expect many firms will issue negative earnings guidance ahead of 1Q reporting season that takes place from mid-April to mid-May. (i) The polar vortex and associated weak economic data has translated into negative sales and earnings revisions for nearly every sector during the past one and three month time frames. (ii) Profit margins for the broad market and most sectors stand at record high levels. Managements have been struggling to maintain current margins, a point that was made abundantly clear on the recent quarterly conference calls.” (Goldman Sachs)
“Bottom-up 2014 consensus EPS estimates revised nearly 100 bp lower since start of 4Q earnings season to $118. Of 122 companies that provided guidance 75% announced numbers below consensus estimates for full-year 2014 earnings.” (Goldman Sachs)
“Companies have been expressing concerns about high fourth-quarter expectations in the form of earnings guidance. So far, S&P 500 companies have issued negative guidance 103 times and positive guidance only 9 times. The resulting 11.4 negative-to-positive guidance ratio is the most negative on record by a wide margin. The highest N/P ratio prior to this quarter was 6.8 for Q1 2001.” (Thomson/Reuters)
It should be remembered that not all companies provide forward earnings guidance. There is also no indication or level of how big the divergence is when being compared to earlier guidance. At the same time, analysts are currently expecting double digit growth for 2014 earnings.
Analyst Earnings Revision Cycle:
Average Progression of Quarterly Estimate S&P 500: