Trailing earnings results get the headlines, but for professional investors, what happened last quarter is nothing compared to company guidance for quarters to come. From that perspective the decent earnings we've seen thus far are masking a grim first quarter.
"We've had 61 companies overall issue guidance, 50 of those have been negative," says John Butters, senior earnings analyst at FactSet, in the attached video. That works out to more than 80% warnings versus hikes, much higher than the 61% of companies trimming estimates during an average quarter.
As always the excuses are all over the board. Weather, sales cycle and lingering effects of the fiscal cliff debate have all been cited by different companies. Butters says the theme running through most of the warnings are stubborn weakness in Europe, the global economy, and a dash of whimpering about currency exchange rates being less favorable.
The plus side is increasing confidence in Emerging Markets (EEM), particularly in China. Butters ticks off General Electric (GE), DuPont (DD) and Alcoa (AA) as three of a slew of industrial companies looking for a more steady period of growth from overseas, ex-Europe.
The worst sector by far in terms of weakness is Health Care & Pharma (XLV) where nearly 9 out of 10 companies issuing a forecast have taken numbers lower. Weak pipelines, bad government policy, foreign concerns and most everything else have been blamed.
All this warning obviously hits the overall earnings growth rate for the S&P 500. Going into the reporting season Butters says analysts were looking for 2.5% growth in both revenues and EPS for the first quarter of 2013. That number is now 0.5% and not likely to move any higher.
As it stands, the S&P500 has gained more than 5% for the year while earnings estimates have been cut by 80%. In a rational world, one of those measures would have to change. In the market we live in the disconnect can last indefinitely.
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- John Butters