Q3 Earnings Outlook: Uncertainty Prevails

LOS ANGELES, CA - AUGUST 16:  Customers shop a...

LOS ANGELES, CA - Customers shop at the Home Depot store

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No surprise, but “uncertainty” is the theme once again this earnings season. The word has been dropped into almost everyone’s conference calls so far and echoes much of what we are hearing both on the Street and off. Earnings have been mixed, but even those beating have been warning about future slowdowns. And it’s not just EPS that’s worrying, it’s revenue growth too.

Of the 93 S&P 500 companies that have reported so far, total earnings are down 0.5%, with 58.1% of the companies beating expectations, compared to a beat ratio of 68.8% in Q2. Total revenues are up a meager 0.5%, with only 32.5% of the companies beating expectations, compared to 39.8% last quarter. Keep in mind, these numbers are based on reduced expectations, and if we keep going at this rate, there may well be another wave of lowered estimates in the coming weeks.

One interesting twist in this earnings season story? Tech stocks have been disappointing. Google, Microsoft, IBM, Intel - none has delivered what investors were looking for. Financials have fared better, but to be fair, they continue to be treated with kid gloves by the Street, making “less bad” a good thing. Furthermore, if things really are looking bad-to-worse out there, you’d think we’d see earnings winners coming from names like McDonald’s and Dollar Tree, but even they are forecasting a challenging economy ahead.

In keeping with trends, global economic woes continue to be a constant presence, if a subdued one. So far, turmoil in Europe and China has taken a backseat to corporate earnings in the market, but the threat hasn’t gone away and it’s likely only a matter of time before it rears its head again.

So, what does it take to make investors happy this quarter?  From what we’ve seen, companies at least meeting top and bottom line expectations AND forecasting something positive AND not trading at or near highs seem to fare pretty well.  Piece of cake, right?