Breakout

Earnings Guidance: Why Are Companies So Negative?

Breakout

You've surely seen the ad for Trident gum bragging that "four out of five dentists recommend sugarless gum." While this overwhelming endorsement always made me wonder about the fifth dentist, the collective message of the majority is clear and powerful.

Interestingly, we have a comparable situation brewing on Wall Street right now. As we approach the heart of earnings season, it seems four out of five companies that have dared to project earnings have done so negatively, or below analysts' expectations.

"We've actually had one of our most negative pre-announcement seasons in quite some time," says John Butters, senior earnings analyst at FactSet. "If you look at the raw numbers, we've had 86 S&P 500 companies guide estimates lower — so the percentage of negative pre-announcements now stands at 78%."

Related: After Alcoa, What Is Wall Street Expecting for Q1 Earnings Season?

Not only would that be a record high for pessimism as it pertains to future profit growth expectations, but it also points to a troubling disconnect between Wall Street and Corporate Corners. However, despite this deluge of cautious comments, Butters points out that ''overall estimates have come down only about 3% for the S&P 500" this quarter.

The guidance has been negative and lopsided, but Butters says there's a simple explanation for the comparably mild cuts in analyst estimates. Specifically, the heavyweight financial sector (XLF) has actually seen its consensus growth rate creep higher during the quarter, which has gone a long way to mute some of the impact and negativity seen in other sectors.

Butters says we won't get much in the way of second-half/full-year guidance until this summer. But in the meantime, he will be listening closely for any signs of trends and weaknesses that could emerge earlier. In particular, he is keeping an eye out for what is being said about emerging markets and Europe and is looking for signs of improvement. On the home front he's looking for any benefits from the improvement in housing, as well as what he refers to as a "broad category of fiscal policy," which includes tax increases, delayed tax refunds and months of tough budget negotiation and fiscal posturing.

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