As we head into the thick of earnings season over the next few weeks, it's a good time to look at what's going on with Earnings Estimate Revisions (:EER). And one way that I like to do that is by sector.
Since Zacks collects all the earnings estimates and revisions from the Street, every day, we get to compile the data in some unique ways so we can get a good look at big picture trends.
The last time I looked at our aggregate EER data was in mid-July, when I thought we may be in a period of peaking corporate profits. I wanted to see what individual sectors had to say.
The table below displays what we call the EER Ratio for the S&P 500, which is simply upward EER vs downward ones. I have picked five broad sectors that represent some of the highest investor interest and sensitivity to the economic cycle. And I threw in Consumer Staples (XLP) for a base of comparison..
Obviously, an EER Ratio over 1.0 means more estimates have gone up than down. Below 1.0 means more negative revisions than positive. In July, I compared data to the year ago period by taking the average of the first 3 weeks for each July. In the middle column, I show the interim peak ratio and when it occurred.
This week, I am adding the August average (4 weeks of data) and the September numbers through October 2nd (5 weeks of data) so that we can see the improvement out of a pessimistic spring. And August is significant because it is one of the four months of the year that will typically have the most revisions as it comes after most companies in the S&P have reported for the June quarter.
In July, downward EER dominated. At the time I asked, 'Is this a sign of peak earnings or will the S&P continue to shoot for its first year over the elusive $100 EPS mark?'
And I had to admit that I didn't know. But I promised to keep an eye on the revision trends along with our Director of Research, Sheraz Mian, and his excellent updates every week. Here's his preview of Q3 from last week, Earnings Expectations: Too High or Too Low. Be sure to look for a new piece next week on the home page.
Also back in July, it was worth pointing out some bright spots: Construction and Transportation sectors were sporting very positive EER Ratios at 1.4 and 1.0 respectively. By the way, Zacks breaks the market/economy into 16 sectors vs the traditional 9 Select Sectors of Standard & Poors (represented in the table by their SPDR ETF symbols).
What's new is that Construction has continued its strong trend, with an average EER for August and September of 1.25 and 1.49 respectively. This fits with the 'animal spirits' we've been seeing in the housing recovery.
Meanwhile, Transportation continues to drop at 0.86 and 0.26 for those months. This fits with the dismal performance we've seen in the Dow Transports index and weaker outlooks from FedEx and the rail companies.
One sector conspicuous by its absence is of course the Financials. The sector has been the strongest this year, with about a 24% return, versus about 22% each for Consumer Discretionary and Technology. Finance has averaged an extremely stable EER just over 1.0 for both August and September.
Observations and Conclusions
Estimates have been coming down, there is no doubt about that. But not as fast as we expected in July. The aggregate impact on bottom-up estimates for the S&P 500 has been less than 1% as it slips from around $103 to $102.
Though downward revisions continue to dominate, the 'less bad' nature of them is somewhat encouraging in the face of the worst Q3 in 3 years and the slew of negative pre-announcements we've already had.
That's why I highlighted the rising EER trend from July through September in green. It's still not positive, but it is going in a good direction and stocks have responded accordingly in the past three months.
The impact on 2013 aggregate S&P estimates has also been tame (so far) with top-down estimates slipping from $110 to $108.50. But these estimates for next year are really dependent on two big factors that haven't been fully, or accurately, weighed yet: (1) more realistic (less optimistic) GDP models for 2013 and (2) corporate guidance and outlooks for the first quarter and beyond.
For clarity's sake, let me reiterate that the bulk of EER will come next month. February, May, August, and November are usually the height of earnings season and so are the center of EER activity where you can see anywhere from 12,000 to 17,000 revisions. Yep, that's counting every single quarterly or yearly adjustment by analysts.
The total market EER ratios for the last 3 weeks have averaged about 4300. The next few weeks will be critical in determining if US corporations can maintain their advances -- and not just in cutting costs that stretch weaker top lines into record bottom ones.
Kevin Cook is a Senior Stock Strategist with Zacks.com
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