UBS just increased its second half earnings estimates for the S&P 500 thanks to surprisingly resilient economic data. It raised Q3 by 4% to $24.50, and Q4 by 3% to $24.50.UBS’s equity strategy team reviewed early earnings reports and had mostly positive (and some negative) things to say.
Early beats remain below 2010 levels, which disenchanted some analysts, and cost pressures could still hit earnings as more than 160 companies report over the coming 10 days.
“Most of the slowdown is in the energy and financial sectors,” UBS strategist Thomas Doerflinger said. “Fully 46% of the absolute revenue increase in Q3 S&P 500 revenue is in the energy sector. Analysts expect net margins in most sectors to be flat-to-down compared to Q3 2010.”
Early earnings reports out from 28 companies have beat analyst consensus by 3%, down from an average 6% beat seen over the past six quarters. Also, the ratio of positive surprises to negative surprises is down to 28%, which compares to the past six quarter average of 44.3%.
Analysts had cut estimates for staples after Kroger, Walgreen and ConAgra reported weak results. However, lower production costs are expected to buoy margins, but a declining dollar may reverse any gains there. UBS also believes consumers are trading down from branded goods to generics when possible to save -- which could hurt companies like Procter and Gamble.
Early results out of Accenture, Adobe, Oracle and Jabil Circuit were all pretty good -- pointing to a relatively healthy quarter for tech firms.
Consumer demand remains strong as companies like Costco, Tiffany and Family Dollar have reported in-line or better than expected profits. UBS notes that well-positioned retailers, most who have cleaned up inventory concerns seen in 2008 and 2009, will continue to beat. Nonetheless, bellwether FedEx posted depressed imports from Asia mainly on electronics.
Discover Financial posted healthy results, mainly on better consumer credit quality. UBS expects this theme to continue as other firms being reporting, with J.P. Morgan next tomorrow. Improving credit remains in focus and analysts try to gauge consumer spending abilities.
Commodity prices have already deteriorated, with an aluminium collapse already hitting Alcoa more than expected. If prices fall to 2010 levels, total S&P 500 EPS would drop between $4.55 and $9.74. Demand has been soft, with Dow Chemical noting that flat or insignificant growth has been seen in about half of its business units.
Settlements with state attorneys general, exposure to Europe, and mortgage losses (and one big rogue trading incident), a number of financials are expected to create headwinds for overall S&P 500 EPS returns. UBS sees losses of $63 billion and $26 billion at Bank of America and Citigroup possible in a black sky scenario, hitting total EPS by $6.40.
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