Q4 Earnings Guidance Deteriorates by One Third

At the end of Q3 on September 30th, consensus estimates for S&P 500 earnings growth in Q4 stood at 9.5%. It is down by 1/3rd since then to just 6.5% – and falling.

The bears will point to this latest data point from FactSet Research and say “Told ya so!”

The bulls will say “Big deal, this trend has been happening all year – Beat-and-Lower is the best strategy for corporate management, why would they stop?”

David Einhorn flagged the beat-and-lower game over the summer, it’s pretty well-understood at this point (see David Einhorn: The New Game is ‘Beat and Lower’)

Anyway, here’s FactSet (emphasis daddy’s):

The estimated earnings growth rate for the S&P 500 for Q4 2013 is 6.5% this week, unchanged from last week’s growth rate of 6.5%. On September 30, the Q4 earnings growth rate for the index was 9.5%. All ten sectors have witnessed a decline in earnings growth rates since that date, led by the Energy sector.

Part of the reason for the drop in expected earnings growth is the high percentage of negative guidance issued by S&P 500 companies for Q4. Overall, 94 companies have issued negative EPS guidance for Q4 2013, while 12 companies have issued positive EPS guidance. Thus, 89% of the companies in the index that have issued EPS guidance have issued negative guidance. This percentage is well above the 5-year average of 63%.

At the sector level, eight of the ten sectors are projected to report a year-over-year increase in earnings for the quarter, led by the Financials (24.9%), Industrials (14.2%), and Telecom Services (14.0%) sectors. The Energy sector is expected to see the lowest earnings growth rate (-7.2%).

How much longer can beat-and-lower continue? How much lower can Q4’s estimates sink before reporting time circa late January before it erodes confidence in the stock market?


FactSet Research


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