The 3Q earnings season is largely complete with over 90% of S&P 500 companies having reported. The beat rate is 65% with YoY gains in operating earnings reaching 18% in Q3. Revenues are up 10.1%, down from 11.2% in Q2. Energy revenues jumped 33% while Financials dropped 9%. Excluding these 2 sectors, average revenues rose 9.2%, down from 10.7% in Q2.

Trailing 4Q EPS are now $94.78, up 4.2% from $90.91 after Q2.

According to ISI

The aggregate earnings surprise is just under 6%, with over 1% of that growth due to counter intuitive gains in the banking space from the rise in their CDS yields.

That said, the prospects for earnings growth in the 4Q and beyond are murky. On the positive side, corporate guidance, a leading indicator for earnings revisions, has improved since peaking in late September. In the last three weeks there has been more upside guidance announcements than downside. For the 4Q, the core domestic EPS fundamentals look favorable. Price gains are outstripping cost increases and volume growth is still positive.

It remains that earnings revisions have been mostly negative in the last 2 months, the last month being particularly weak as this RBC Capital Markets chart shows:


The risk over the next 6 months is obviously in foreign earnings as the Eurozone (some 20% of S&P 500 EPS) is almost in recession and as currency translation gains turn negative along with a reviving US dollar. ISI estimates the currency swing at nearly $1.80.

Not so obvious is how the US economy will fare in 2012 and how it will impact earnings. I don’t have a great crystal ball and I generally prefer the safety of reported earnings to the vagaries of earnings estimates.

While it is most generally safer to use trailing earnings, it is preferable to discount reported earnings when recession looms. The US economy is currently flirting with recession and Europe’s problems are obviously not helping. There is also continued uncertainty on the fiscal drag in 2012. RBC Capital Markets provides 2 charts that help assess future trends and these are not encouraging at present.

Sales growth is likely to slow down shortly while CEO’s confidence level is pointing to lower EPS growth rates in coming quarters.



Standard & Poors calculates that consensus estimates for 2012 is nearly $108, 14% higher than trailing earnings. In the current highly uncertain environment, I would not venture beyond $100.

Keep in mind that the sub-prime crisis was never suppose to spread to the overall US economy, even less so to the international economies and markets. Globalized economies and financial markets are efficient transmitters and, for now, I am inclined to favor prudence, especially when I read and listen to our politicians.


Leave a Reply

Your email address will not be published. Required fields are marked *