Disturbing background for the third quarter earnings season that starts this week raises the odds for a dip on earnings news over the next few weeks.
Wall Street analysts cut their estimates for 2011 earnings for the companies in the Standard & Poor’s 500 in September, according to Bloomberg. That’s the first decline in quarterly earnings estimates since June 2009.
The reduction isn’t big—the estimate for 2011 earnings declined to $95.17 in September from a high of $96.16 in August—but the shift in direction is likely to increase uncertainty and worry just as third quarter earnings season starts with announcements from PepsiCo (PEP) and Alcoa (AA) today, October 7. (PepsiCo reported earnings of $1.22 a share for the third quarter before the market opened today. That matched the consensus analyst estimate. Revenue came in slightly above consensus of $15.38 billion at $15.51 billion. But shares were down 3.4% as of 12:30 ET today because the company lowered guidance for the full year to $4.08-$4.12. Wall Street consensus had been at $4.17 for 2010.)
After an 8.8% gain on the S&P 500 index in September, investors will be looking for reasons this earnings season to take profits or to hang on in anticipation that the rally will continue. Disappointing guidance for 2011—if in their post-earnings remarks CEOs take the same direction as analysts—will certainly push the balance toward profit taking.
Especially since it looks like the quarter to quarter pattern is pointing in the same direction of slower earnings growth. Profits for the S&P 500 companies are projected to increase at a 23% year to year rate in the third quarter. That’s would be down from the 49% growth rate in the second quarter and the 52% rate in the first quarter of 2010.
Some investors will decide those numbers are evidence of a fatal slowdown in growth. In my opinion, while it’s clear that the U.S. economy has slowed/will slow in the second half of 2010s the drop in earnings growth is equally attributable to tougher year on year comparisons. Current earnings growth is lower than in quarters earlier in the year because those earlier quarters were being compared with truly terrible quarters for the economy in early 2009. More recent quarters are being compared with stronger quarters in 2009 that reflect the beginnings of the recovery. For example, the U.S. economy grew by 5% in the fourth quarter of 2009.
Although I think the decline in 2011 estimates raises the odds for an earnings season dip in stock prices, I also believe that any dip is likely to be limited. The decline in earnings projections for 2011 to $95.17 isn’t very large and it still leaves stocks very reasonably priced at just 12.1 times projected 2011 earnings. With earnings growth still projected at 15% for 2011 equities are still a good deal, especially with yields on competing investments in the bond market at such low levels.
The decline in analyst earnings projections wasn’t limited to U.S. stocks. Analysts cut 2011 earnings estimates in 20 of the world’s developed markets last month. Earnings estimates for London’s FSE 100 index, for example, have declined 4.9% since the beginning of May, according to Bloomberg.
This market is going to go which ever way the white house wants it to go. All the public talk and loose rumors about them being ready, willing, and able to pump as much as another Trillion $$$ in to the system by buying stocks, bonds, and what ever else they want leading up to the loss of 95000 more jobs shows the control they are now taking and have over the whole market. This past Friday was a perfect example, loose another 95000 jobs and the market goes up on the hopes of all that future taxpayer’s money to push it up even further. Looks a lot like a new Govt. made bubble being made to me. hope not, we all know what happens to bubbles sooner or later.
Is a slight dip in the market worth missing a run up after the dip? As long as the dollar drops, as the government has said it will, people will be flushed out of bonds that pay lower, and into the market just as they have done since the dollar started dropping again. Who knows ….. i see the market going to the April 2010 hiigh of S&P 1217, then on to 1250 target. Again, who knows, this market has been a real tangled mess to work with, until lately when the dollar has been driving folks into the equities due to the dollar dropping, as mentioned previously. Regards
robert ain’t it a fun game…
I wish the market would pull back, I was scared in aug, now I don’t know what the think. Waiting to pick up NEM @ 57
Isn’t it more realistic to assme that any dip in the stock market will be on a rise in the oversold US dollar.
If earnings come in OK, and the dollar trends up, then we have a market decline.
If earnings are OK, and the dollar trends further down, we have a market rally.
And if the dollar trends down, and oil rises, then we have another trigger that drives the market haywire…
Just my guess..