We’ve heard this story before: analysts freak out ahead of earnings announcements, and then they slash their earnings estimates. This is exactly what happened going into the recent Q3 earnings season (see chart below).
But when companies announced their actual Q3 results, most of them beat expectations.
And now we’re heading into Q4, and it’s deja vu all over again.
Stock market guru Ed Yardeni put together this chart of quarterly earnings estimates over time, which also adjusts as earnings get released.
Photo: Dr. Ed’s Blog
As you can see from the purple line, Q4 earnings estimates have been coming down sharply in recent weeks. Yardeni points out a notable similarity with Q3 earnings:
Interestingly, the current estimate for last year’s Q4 is the same as the estimate for Q3 at the start of that earnings season. The actual result reported during October beat expectations by more than a buck, yet analysts continued to trim their Q4 expectations. Obviously, they were unsettled by mounting prospects of a financial meltdown and a recession in Europe.
At least some of these revisions are justified. Some big names have already announced some major warnings. Morgan Stanley’s Adam Parker recently pointed this out when he published his gloomy forecast for the S&P 500.
Recent company results have been weak, with companies like TXN, INTC, MU, ORCL, CRM, RHT, DRI, COST, FDX, and WAG reducing their outlook. This likely portends weak January results or April guidance.
So, will this be a repeat of Q3? We’ll find out soon. Alcoa kicks off Q4 earnings season next Monday.