After the sharp rebound in earnings experienced since March 2009, the Q2 earnings season we’re now entering is set to show earnings growth slow substantially.
Expect far fewer companies beating earnings estimates, and raising their future earnings guidance, even if earnings won’t be a disaster either:
The behaviour of financial markets now points to a slowing in profit gains ahead (see figure 3). End-of-quarter weakness may negatively affect guidance for coming quarters amid strong estimates for 3Q. The consensus EPS level rises 41% at a seasonally adjusted annualized rate from a somewhat-pessimistic 2Q estimate, though this estimate is volatile and will be affected by actual 2Q results.
After rebounding hard, S&P 500 earnings growth is set to plunge: (shown in black)
In addition, to us the chart below shows how CEO confidence has room to fall, and thus mean-revert a bit, given how far it has improved since the crisis. This could lead to less bullish corporate outlooks in Q2 vs. what we saw in Q1:
By the end of this season, we’ll all be pretty familiar with what a falling EPS growth chart looks like. Thing is, given what the U.S. market went through not too long ago during the crisis, and how major indices remain well below pre-crisis levels, as long as this earnings season isn’t a disaster then we should be OK and muddle through at the very least.
(Via Citi, Monday Morning Comments, Steven Wieting, 12 July 2010)