You've all likely heard the saying "the tail wagging the dog" in reference to something small having an outsized effect on something large. Well, when it comes to 3rd quarter earnings, the tail is now Goldman Sachs (GS) and the dog is the Financial Sector (XLF).
According to FactSet Senior Earnings Analyst John Butters, the flight of analysts from Goldman Sachs and the slashing of their estimates has been nothing short of brutal.
"At the start of the third quarter, analysts were looking for Goldman to earn about $3.62 per share," Butters says in the attached video. "As of today that has dropped down to 13 cents."
Now the tail & dog part.
If you exclude Goldman Sachs from the other 80 stocks in the S&P 500 Financials, Butters' research shows that the sector's 6.6% growth rate would nearly double to about 11%. As it is, analysts had seen the sector's growth at 21% as recently as the end of June. Goldman reports 3rd quarters earnings on Oct. 18.
Furthermore, Butters says about half of the decline in the broader S&P 500 estimates for Q3 are the result of one sector - Financials. And we are not talking peanuts here, people, we are talking about a 30% plunge in S&P 500 profit expectations that has seen them go from 16.4% to just 11.7% in a matter of weeks.
Some of you might recall a similar outsized influence on Financials in the 2nd quarter at the hands of Bank of America (BAC). Butters reminds us that that was the result of a huge one-time charge the bank announced late in the 2nd quarter. In the case of Goldman, however, Butters says it is simply "a case of where analysts have just been taking down their numbers from the start of the quarter."
Goldman may be getting hit the hardest, but to be fair, it's not alone. Butters says the other half of the Financials estimates story is "more broad-based" then in the 2nd quarter and can be seen in lowered expectations for Morgan Stanley (MS), JPMorgan (JPM), AIG (AIG), Citigroup (C) and Bank of America (BAC).
For the record, JPMorgan was able to beat its lowered expectations today and posted a 4% drop in net income with earnings per share of $1.02 versus $1.01 a year ago and expectations of $0.91.
And for those forward-looking types who have been eyeing the projected 100% earnings explosion for the Financials next quarter, Butters has shed some light on that trap too. His research shows that, again, with the elimination of just one stock - AIG - that 100% growth estimate for Financials comes crashing down to a much more mundane 17%. It's all because the insurance giant posted a massive loss a year ago.
(Editor's Note: Since our interview with John Butters, the consensus estimate for Goldman Sachs has fallen further. As of this writing, FactSet shows the median estimate has now slipped to a loss of $0.05 from a slight profit of $0.13 mentioned in this piece.)
- Goldman Sachs
- John Butters