Q3 Earnings Expectations

Q3 2011 earnings season began with Alcoa on Tuesday. The rest of this week will be light in terms of number of companies reporting (just 7 other S&P 500 companies scheduled to report); yet they will command significant media/investor attention. Given the current uncertain macro backdrop, this earnings season will be an important checkpoint for an updated management outlook.

Despite downward revisions to estimates during the past three months, analysts are still expecting another solid quarter of earnings and revenue growth for the S&P 500. The index is currently predicted to see earnings growth of 12.0% (on earnings of $233B), and revenue growth of 9.7% (on sales of $2,438B). If the final earnings growth rate is 12.0%, it will mark the eighth consecutive quarter of double-digit earnings growth. Nine of the ten sectors are projected to see growth in earnings and all ten sectors are projected to see growth in revenues.

During last quarter’s earnings season, macro events and sector performance seemed to dominate fundamentals. This season, fears of the future are trumping current good news. Investors seem to recognize there is extraordinary relative value in stocks, however this value is underappreciated because there are tremendous fears over the situation in Europe, the implications for the U.S. economy and future corporate profits. Some investors will be looking for more commentary from companies on their ability to generate high revenue growth in emerging markets to offset weak economic growth in the U.S. Almost all investors will be looking for clues as to whether the overall economic growth seen in 2011 can be sustained (or even better increased) in 2012

Yesterday’s 300 point rally is a good sign that investors are willing to play, as long as fundamentals and growth potential justify it. I think John Haynes, head of research at Investec, summarized the Q3 season outlook perfectly when he said,“The core earnings capacity of the US economy is still doing pretty well, but no one is going to not take the opportunity to mark to market the expectations for the fourth quarter and beyond. The third quarter is always a difficult quarter. Every year, this is the confessions season."

Q3 2011 – Q3 2012: Earnings Growth Rates
Sector    Q311  Q411  Q112  Q212  Q312
Consumer Discretionary    16% 10% 9% 9% 16%
Consumer Staples    5% 6% 6% 9% 11%
Energy    43% 25% 10% 1% 13%
Financials    8% 101% 17% 80% 28%
Health Care    2% 5% 2% 3% 5%
Industrials    14% 10% 15% 12% 18%
Information Technology    7% 8% 5% 5% 15%
Materials    32% 22% 12% 15% 26%
Telecommunication Services    14% 12% 11% 16% 10%
Utilities    -1% 3% -3% -6% 0%
S&P 500    12% 20% 9% 14% 15%
Enhanced by Zemanta