Q4 Earnings Drop Below 10%
With 362 S&P500 companies reporting Q4 earnings, year over year growth is now 9.3%.
An interesting take on this how earnigns are being reported as the Quarter progresses. Birinyi Associates notes that "last quarter, earnings growth steadily climbed to 22.8% as more and more companies reported. This quarter, however, the number has steadily declined since early January."
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click for larger chart
Chart courtesy of Birinyi Associates
From today's FT:
"The percentage of US companies failing to meet Wall Street's earnings expectations has reached the highest level in more than two years, fuelling fears that corporate America's record run of profit growth will come to an abrupt end.
Concerns of a slowdown in corporate profitability – one of the key reasons for the stock market's record-breaking streak – have been heightened by companies' increasingly bearish outlook on business prospects.
More than 22 per cent of the 400-plus S&P 500 companies to have reported results for the fourth quarter of 2006 failed to meet Wall Street expectations. This is the highest level of "misses" since the third quarter of 2004, according to Reuters Estimates.
The spike in earnings disappointments increases the chances that corporate America will end a three-and-a-half year run of quarterly double-digit profit growth in the last quarter of 2006 rather than at the beginning of 2007, as widely expected."
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Sources:
US slowdown looms as groups miss targets
Francesco Guerrera
FT 1:40 a.m. ET Feb 12, 2007
http://www.msnbc.msn.com/id/17104615/
Monday, February 12, 2007 | 11:45 AM | Permalink
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"The percentage of US companies failing to meet Wall Street's earnings expectations has reached the highest level in more than two years, fuelling fears that corporate America's record run of profit growth will come to an abrupt end."
Come on...are there only 2 speeds to this machine -- full throttle or off?
I thought we all agreed that the economy was slowing down (needed)? The debate here and elsewhere was whether we were falling off a cliff or a soft landing?
Jeesh! So the question frankly is -- is > 9% eps GROWTH (in the face of the slow down) that bad?
Place yer bets!
Posted by: Fred | Feb 12, 2007 12:47:23 PM
Don't want to be a conspiracy nut but.... 3'Q earning would have been announced in October and early November - just ahead of the mid-term election. Big gains would have enabled the GOP candidates to crow about the strong economy under Bush and change the subject (hopefully, although it didn't work) from Iraq. Perhaps 4'Q is the adjustment for juicing the 3'Q results. Why not just average the two which is a nice 16% gain.
Regards,
Jim
Posted by: Jim | Feb 12, 2007 12:55:41 PM
I doubt that very many analysts would risk their careers for a candidate -- and even less CEO/CFOs who have to sign an affadavit about the truthfulness of their earnings and guidance ...
Posted by: Barry Ritholtz | Feb 12, 2007 2:07:30 PM
BR - I'm not in the conspiracy camp, but this is really about expectations. I suspect there are ways to manage expectations without having to resort to outright lying.
Posted by: Estragon | Feb 12, 2007 2:22:55 PM
Good points well argued, Fred.
The glass is always half empty for many.
Posted by: Nova Law | Feb 12, 2007 2:55:31 PM
It's getting tougher to manage earnings, no doubt. Companies should collectively come around to accepting the highs and lows of the business cycle and planning for the long haul - quite a few already are doing that, actually, as evidenced by the flood of companies being taken private. See the example of J. Crew - when freed to not have to meet the burden of quarterly expectations by the public, it can allow a business to make the hard choices necessary for long-term growth and success.
Posted by: worth | Feb 12, 2007 3:25:00 PM
It's getting tougher to manage earnings, no doubt. Companies should collectively come around to accepting the highs and lows of the business cycle and planning for the long haul - quite a few already are doing that, actually, as evidenced by the flood of companies being taken private. See the example of J. Crew - when freed to not have to meet the burden of quarterly expectations by the public, it can allow a business to make the hard choices necessary for long-term growth and success.
Posted by: worth | Feb 12, 2007 3:26:28 PM
That makes entirely too much sense Worth!
Posted by: Fred | Feb 12, 2007 3:36:48 PM
Every historically reliable indicator is saying recession, and now corporate profit growth is experiencing an "unexpected" slowdown.
Go figure.
Posted by: anon | Feb 12, 2007 4:13:48 PM
"Every historically reliable indicator is saying recession"
except....
-the stock market
-credit spreads
-employment
-wages
-commercial paper mkt
-leading econonic numbers
Anon...if you've been reading this blog, this is not an unexpected slowdown.
Posted by: Fred | Feb 12, 2007 4:29:47 PM
-the stock market
-credit spreads
-employment
-wages
-commercial paper mkt
-leading econonic numbers
Fred, you need to do some research here. The leading economic indicators is useful, I'll grant you, but the rest historically don't tell you much. Especially the stock market. Additionally employment and wages typically peak just prior to the onset of a recession. The indicators I'm referring to are housing permits, the yield curve, and the money supply (if you look at it correctly) have all been very accurate (though admittedly not perfect) predictors of recession in the past. They all say recession now.
Posted by: anon | Feb 12, 2007 5:18:51 PM
The Leading Economic Indicators are less useful than they used to be: The Conference Board rejiggered them in 2005 so that they are now near worthless.
See these links
Posted by: Barry Ritholtz | Feb 12, 2007 6:02:49 PM
Barry,
Quite early this morning I heard on Bloomberg, that although year over year growth for the S&P is now 9.3% (under 10%), it was not a concern...that the S&P would still rise due to consumer discretionarys.
Posted by: Strasser | Feb 12, 2007 6:37:13 PM
Please supply some evidence of your point annon.
Posted by: Kurious | Feb 12, 2007 11:02:45 PM
Kurious,
Just FYI, the "evidence" is all over this blog. Our host's posts regularly covers this information. And follow-on comments regularly debate it.
Within a few weeks of reading BP for the first time, I went back and read all historical posts. You might enjoy doing that, too.
-wunsacon
Posted by: wunsacon | Feb 13, 2007 11:30:53 AM
The decline to under 10% is mostly due to a few very large firms posting declines in their net income (not nesc in their EPS due to share repurchase). Most notable of these are some of the intergrated oil firms (XOM, CVX, COP). Most firms are growing their earnings just fine, thank you. The median year over year growth rate in EPS among the 388 S&P 500 firms to report through the close on 2/13 is 13.0%. positive surprises are leading disapointments by a ratio of 3.1 to 1. Materials, Health Care and Industrials are posting the strongest yr/yr growth while Energy, Telecom and Utilities have the lowest growth (actually single digit negative yr/yr). All sectors have seen more postive than negative surprises.
Posted by: Dirk van Dijk | Feb 14, 2007 7:19:32 PM
Dirk
I went to the S&P web page and just downloaded their earnings spreadsheet. www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
According to this the operating earnings for the S&P 500 are at 8% growth not 13%. The numbers are 21.83/20.19=1.08. Where are you getting your numbers clearly not from S&P. The earnings in Q3 were 23.03 so there is a serious drop in earnings from Q3 to Q4. Since Q4 is traditionally the stronger quarter the last time this happened was in 2000 right before a recession started. Before that it happened in 1990 also right before a recession. I know "it's different this time".
Posted by: dyugle | Mar 21, 2007 8:27:08 PM
