Friday, November 2, 2012

After the AAPL announcement, earnings expectations for S&P500 take a sharp turn for the worse; Barclays remains bearish

The recent earnings guidance from Apple has hit a reset button on earnings growth expectation for the whole US stock market. Earnings per share (EPS) growth expectations for the S&P500 companies corrected sharply to the downside.
Barclays Capital (Barry Knapp, Eric Slover, Adam Sussi): - The early weakness in corporate earnings continued right into the last big week of the 3Q12 reporting season. With 70% of companies having reported, it is clear that even with the heaviest negative preannouncements in our series since mid-2006 and the weakest quarterly expectations since the Great Recession, the bar was set too high this quarter. We had expected weak macro-economic trends to pressure optimistic forward growth rate expectations this reporting season; indeed, since Alcoa’s release (October 9, 2012), 4Q12 expected earnings growth has fallen to 7.2% from 10% and expected 2013 growth has dropped 90bp to 10.4% from 11.3%.

AAPL’s release last Thursday had a particularly marked impact on index earnings expectations. Apple guided calendar 4Q12 EPS 25% below the Street (a ~$3.5bn difference). AAPL now represents almost 5% of 2012 S&P 500 EPS and the guidance shock – relative to estimates and taken at face value – would reduce 4Q12 S&P 500 EPS growth (y/y) by 160bp. Estimates have fallen 100bp since AAPL reported.

Source: Barclays Capital

Of course it wasn't just AAPL. As Barclays points out above, Alcoa, Caterpillar, and others have been hit by the global slowdown - all putting pressure on earnings growth expectations. Only 38% of companies so far have beat earnings estimates - the lowest ratio since the beginning of 2009 (see chart here). The Goldman analyst index (GSAI) recent sharp declines (see discussion) may in fact be driven by the expectations of a significant slowdown in corporate earnings growth. At this stage US equities are propped up more by the Fed's expansionary policy than by the corporate sector fundamentals. The hope of course is that the global macro picture will improve, lifting with it the S&P500 company earnings. The timing however remains uncertain.
Barclays Capital: - The global growth trajectory should continue to drive revenue and earnings, and last week’s October data were hardly encouraging for the corporate outlook. In China, the HSBC PMI trend improved for the second month – but remains below 50 – and the New Orders index reached a six-month high. However, in Europe, PMIs were broadly weaker, suggesting downside risk to euro area 4Q12 GDP forecasts. The decline in the EU new orders-less-inventories was particularly discouraging; we had viewed improvement in these series in August and September as an early sign that Asian exports and global trade would stabilize and improve in 4Q12 and into 2013.
So, broadly, although some signs of stabilization have emerged, data remain mixed and do not yet support a pickup in growth in S&P 500 forward earnings. We think the moderation in expectations is a step in the right direction, but believe there is more right-sizing to come.
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