With the fourth quarter earnings season in progress, some 15% of S&P 500 companies have already reported resulted for the past quarter, and while 73% have beat EPS thanks to such pathetic gimmicks as Intel’s effective tax rate collapse, less than half of companies (or 49%) have beat on the top line.
What is worse, is that for Q4 2015, the blended forecast earnings decline is -6.0%, while revenues are expected to sink by 3.5%. This will mark the first time the index has seen three consecutive quarters of year-over-year declines in earnings since Q1 2009 through Q3 2009.
But an even bigger problem is not Q4 2015, which even the consensus which as recently as Sept 30 anticipated would post a Y/Y increase in earnings has admitted will be a -6% disaster, but the first quarter of 2016, where what until just three weeks ago was predicted to be a 1.0% EPS growth from a year ago, has just tumbled to a -1.7% decline, which would make Q1 2016 the first four consecutive quarters of year-over-year EPS declines since the global financial crisis (despite record amounts of stock buybacks).
It may be even worse than that, with the biggest wildcard again being the price of oil.
According to FactSet, “The estimated average price of crude oil for Q1 2016 is $42.29 (based on estimates from 51 contributors). This estimate is above the average price of crude oil for Q4 2015 ($42.15). Going forward, the estimated average price for crude oil is expected to increase sequentially each quarter during the course of 2016. For Q2 2016, the estimated average price is $45.19. For Q3 2016, the estimated average price is $49.59. For Q4 2016, the estimated average price is $52.54.”
In other words, another hockeystick – one which is nowhere more visible than in what consensus expects to happen to energy EPS growth, which was just slashed once again relative to December 31, 2015 all the way from Q1 2016 to Q3 2016, but for some reason Q4 EPS is now expected to soar by 75%!?
Meanwhile, the risk is not Q4 but Q1, where as Factset notes, at this point in time, 11 companies in the index have issued EPS guidance for Q1 2016. Of these 11 companies, 10 have issued negative EPS guidance and 1 has issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 91% (10 out of 11). This percentage is above the 5-year average of 72%.
It is when looking at this troubing development, and specifically Citi’s global earnings revisions dataset, that the iconic Matt King notes that “one of the most interesting and concerning developments we are keeping an eye on is the drop to a seven-year low in ‘global earnings revisions’, the index our equity strategists compile to measure shifts in consensus expectations.
This is what Matt King adds:
What is alarming is the way in which the downward revisions seem to have spread beyond just emerging markets and materials. They are most intense there, but almost every sector has suffered a deterioration, and many are recording near-record levels of downgrades. Why this should be so is slightly mysterious: GDP forecasts seem mostly to be lagging at this point, so it is unlikely analysts are responding to them; guidance from management is another potential factor, but with earnings season only just beginning, many managements have been in blackout periods.
Could equity analysts be getting cold feet in the same way as equity investors seem to be? After all, 2015 did feel like at least the third year running when equity pundits stated at the start of the year that “this is the year earnings really need to deliver, otherwise the market will sell off” – only to find that the market had again re-rated by the year-end. While we do think the leverage cycle revolves more around psychology than about specific levels, our equity strategists have helpfully pointed out that we have usually ticked into the bubble bursting phase at tighter spreads than these, and the only time we have had these spread levels and not had a recession was in 2011, when we were rescued by Draghi doing Whatever It Took.
Indeed, central banks rescued us in 2011 with the biggest “hail mary” can kicking in history. But as the chart of “global earnings revisions” shown below demonstrates, we are now below the 2011 level when Draghi suspended belief in fundamentals for another 3 years.
Who will be the central banker who pulls a Draghi this time around?
via Zero Hedge http://ift.tt/1PsOd9Q Tyler Durden