Earnings season coming in to focus

Posted on October 22nd, 2012

Earning season started about 2 weeks ago with some modest promise. Several firms were meeting expectations and revenues were close to on-track. But that seems so long ago now. Last week was the real beginning of earnings season and many began to fail. And this week and next week will see the most companies report.
The current picture that is coming in to focus is not looking as rosy as we had all hoped. I read this morning that of all of the S&P500 companies to report so far, half of them have missed on the market’s revenue expectations for the company. I have not verified that number yet but if it is accurate ( and I trust the source where I read it) then it is a VERY high percentage when you look historically at earnings reports.
If you remember last quarter, earnings reports were fairly good – but not spectacular for the 2nd quarter. But it seemed like a record number of CEOs cautioned that the 3rd quarter earnings had them worried. But most of those CEOs did not actually revise their outlooks. They cautioned but indicated that they lacked the visibility to revise downward. In addition, most of them had confidence that their teams would deliver.
I bet that many of those CEOs wish now that they had revised expectations downward when they had the chance. Revising downward in the middle of an earnings announcement where you already missed usually hurts even worse for a stock.
I think this earnings season will continue to be mixed – but it will be difficult for the market overall to meet earnings expectations given the poor early start. The last two quarters, roughly 70% of companies beat or met their profit expectations. That seems out of the question this quarter. Yet, I don’t think the market levels right now reflect that hypothesis. So, we’ll need to see some really good reports this week and next or the market will likely see some downward pressure going in to the election.

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