{"id":198,"date":"2012-10-09T15:24:44","date_gmt":"2012-10-09T15:24:44","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=198"},"modified":"2012-10-09T15:24:44","modified_gmt":"2012-10-09T15:24:44","slug":"what-to-expect-in-q3-profits","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=198","title":{"rendered":"What to Expect in Q3 Profits"},"content":{"rendered":"<p>Uh oh. <strong>\u00a0COMPLACENCY ALERT\u00a0 \u00a0COMPLACENCY ALERT\u00a0<\/strong><\/p>\n<p><strong>The Wall Street Journal<\/strong> just ran an article saying Q3 earnings will be poor but it doesn\u2019t matter because the Fed is pumping in liquidity.\u00a0 Unfortunately weak earnings <strong>most definitely do<\/strong> matter because Fed pump priming won\u2019t boost GDP much if we continue to pursue anti-growth regulatory and fiscal policy (which makes the presidential election critical for investors).\u00a0 And the widespread notion that stocks simply floated higher over\u00a0 the last three and a half years on a sea of liquidity is false; stocks only climbed about as much as earnings increased.\u00a0 So the PE, in fact, did not expand much.\u00a0 The bull market was an earnings story, not a liquidity story.<\/p>\n<p>The talk of the Street is that Q3 S&amp;P profits are expected to decline slightly year-on-year, which is surprising to some because the U.S. is not in recession.\u00a0 But it is not surprising to us; more than a year ago we were forecasting 2012 S&amp;P EPS of $102, which is about where strategists are now.\u00a0 (We later went as low as $99, which hopefully was a bit too bearish).\u00a0 S&amp;P is not GDP.\u00a0 When net margins are at record levels and global GDP growth slows, it is not at all surprising that a combination of weak revenue (driven partly by declining commodity prices) and margin pressure would cause profits to decline slightly <strong>even though GDP growth is still positive<\/strong>.\u00a0\u00a0 This is roughly what happened in the Asian financial crisis of 1998 \u2013 despite much more robust U.S. GDP growth than we have now.<\/p>\n<p>Themes for third quarter earnings:<\/p>\n<ul>\n<li>Q3 earnings will indeed be weak, but not much weaker than investors now expect. \u00a0The quarterly \u201cprofit wild cards\u201d such as currency, oil prices, and Wall Street results are relatively benign this quarter.\u00a0 Investors are already braced for poor earnings, and our read of the \u201cearly reporters\u201d (companies with a quarter ending in August) is that earnings were soft but not terrible.\u00a0 We had strong reports out of homebuilders, certain tech companies (ORCL, Accenture), and a financial (Discover).\u00a0 But stocks leveraged to global growth (FDX, NKE) fared poorly.\u00a0 The domestic consumer is weak but not a disaster (AZO, BBBY, GIS, CAG, MAR).<\/li>\n<li>Where we expect the weakest results and the biggest estimate cuts are globally exposed cyclical \u00a0companies.\u00a0 Europe is in a severe recession that is getting worse.\u00a0\u00a0 ECB bond buying will not save the real economy, but fiscal austerity will hurt it (Krugman is not always wrong).\u00a0 Meanwhile the BRICs continue to crumble.\u00a0 The situation in China is opaque but clearly worse than expected, with weakness extending well beyond public investment to the consumer sector.<\/li>\n<li>Therefore many global industrials will have poor earnings, as illustrated by recent news out of UTX, EMR, and CAT.<\/li>\n<li>One of the stronger sectors will be housing related stocks, including banks leveraged to housing.\u00a0 This is a good investment theme but is not big enough to drive overall S&amp;P earnings.<\/li>\n<li>We don\u2019t love their underlying fundamentals, but consumer staples\u2019 earnings will be helped by weaker commodity prices (apart from corn and meat) and a weaker than expected dollar.\u00a0 The broad Fed dollar was 2.9% weaker in September than June, so Q3 guidance was based on too-bearish currency assumptions.\u00a0 Big pharma will also benefit significantly from a weaker greenback.<\/li>\n<li>Corporations (but not governments) have extra money to spend on improving efficiency, and the results of Oracle and Accenture suggest they are spending it.\u00a0 That\u2019s broadly positive for enterprise technology companies, such as IBM and Cisco.\u00a0 But PC demand is weak for both secular and product cycle reasons, a negative for some chip stocks.<\/li>\n<\/ul>\n<p><strong>Bottom line<\/strong>:\u00a0 After all the hype about \u201cfirst down earnings since 2009,\u201d we expect the media to conclude that Q3 results were not as bad as feared.\u00a0 However, forward estimates will continue to drop.\u00a0 The 2013 bottom-up estimate is $116; $106 looks more plausible, and if we go over the dreaded \u00a0fiscal cliff $100 is a distinct possibility.<\/p>\n<p>It is not really \u201ctypical\u201d for companies to provide forward guidance for the coming year when they report Q3 results in October and early November.\u00a0 But we expect fewer companies than usual to provide 2013 guidance when they report Q3 results, for two reasons.\u00a0 The global macro picture is exceptionally \u00a0opaque and potentially even worse than it appears\u00a0(particularly China), and, secondly, the U.S. election and fiscal cliff create extreme policy uncertainty in the U.S.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Uh oh. \u00a0COMPLACENCY ALERT\u00a0 \u00a0COMPLACENCY ALERT\u00a0 The Wall Street Journal just ran an article saying Q3 earnings will be poor but it doesn\u2019t matter because the Fed is pumping in liquidity.\u00a0 Unfortunately weak earnings most definitely do matter because Fed &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=198\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-198","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/198","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=198"}],"version-history":[{"count":2,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/198\/revisions"}],"predecessor-version":[{"id":200,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/198\/revisions\/200"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=198"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=198"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=198"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}