Depending on where you look, the 1Q12 earnings growth rate for the S&P 500 is either expected to be 3.2% (ThomsonReuters) or -0.1% (Factset), with most sectors showing a decline. Even if you take the optimistic view of 3.2% growth, that number drops to 1.8% if you strip out Apple. That’s setting the bar pretty low.
If you look at the run-up in the market over the last two quarters, however, it appears that investor expectations are probably a lot higher than these numbers would have us believe. For those of you getting ready to report, meeting these tepid expectations will not garner much excitement from the Street. On the other hand, missing lukewarm estimates is full on frightening. To take it a step further, if a lot of companies miss, it could be devastating to the market. Companies that beat (and hopefully that’s most of you), are in much better shape, but will likely have to surprise in a big way to get a serious boost in stock price.
This attitude is in large part due to investor skepticism over further market gains. The S&P 500 is up 26% from the lows in 4Q11. Huge. Volumes have been light, QE3 is off the table and corporate growth forecasts continue to be revised lower – all of which leads to a curbed appetite.
As we have seen over the last couple of years, macro news and natural disasters are a constant threat to corporate news during the earnings season. A recent rise in the VIX (volatility index) and euro-zone contagion fears have stocks headed back to the dreaded “risk on, risk off” trading environment and correlations are creeping higher again. Greece was written off by the Street last quarter, so there’s not much risk of them rocking the boat, but the same cannot be said of Italy and Spain, both of which have had tough bond auctions lately. Meanwhile, China has been reporting less than stellar economic data recently raising questions about the stability of their economy and the potential ripple effects.
Overall the drivers heading into this earnings season look eerily similar to last year. Does that mean these are the “new realities” we should expect going forward? Are investors resigned to accept lower corporate growth rates? If so, the market may just continue to trade in a narrow band on light volumes as traders look to other asset classes in order to find better rates of return.
I personally don’t think we are there yet, but the question is certainly out there.