Wall Street strategists are forecasting 2012 S&P 500 EPS of $100-$105.\u00a0 After fairly good first quarter results, their estimates edged up toward $105, but macro deterioration has brought\u00a0numbers down to around $103.\u00a0 My guess is that ultimately (i.e., next March) they end up at $100, driven lower by a severe recession in Europe, slowdowns in China and the U.S., hostile regulatory policy in the U.S., and a strong dollar.<\/p>\n
According to the media, analysts expect a modest yr\/yr gain in second quarter earnings, but many people\u00a0have forgotten that the comparison is exceptionally easy because a year ago Bank of America had a huge write-down.\u00a0 Adjusted for that, Q2 earnings could be flat or down slightly.\u00a0 But the big issue is not the precise level of Q2 profits but how much analysts cut estimates forQ3.\u00a0\u00a0Corporate CEO\u2019s are no better at forecasting the economy than anyone else, but their Q3 guidance will reflect orders through the middle of July, so in a rapidly weakening global economy their comments will contain a lot of “new news.”\u00a0 Is demand just softening, or is it collapsing?\u00a0 We’ll find out.<\/p>\n
You can\u2019t tell the players without a scorecard.\u00a0 Here\u2019s what to focus on in Q2 results:<\/p>\n
Negatives for Q2 Profits<\/strong><\/p>\n Weak Wall Street results.\u00a0 <\/strong>Profits in this industry are impossible to forecast, so surprises can be big and drive the quarterly S&P EPS number up or down quite a bit.\u00a0 After decent Q1 2012 results, Wall Street\u2019s profits were poor in Q2, and the Euro-crisis, the fiscal cliff, and slower U.S. growth\u00a0 mean business won\u2019t improve in Q3.\u00a0 JPMorgan\u2019s big (but how big?) trading loss is another negative.\u00a0 Key EPS reports:\u00a0 JP Morgan, Citigroup, Goldman Sachs,\u00a0 Morgan Stanley.<\/p>\n Weak oil prices<\/strong> are negative for overall profits.\u00a0 Oil service firms will be hurt by weak drilling activity in North America; key reports include Baker Hughes and Schlumberger.\u00a0 Like Wall Street firms, Big Oil\u2019s profits are hard to forecast because there are so many moving parts (upstream results, refining margins, chemical earnings, etc.)\u00a0 Key reports:\u00a0 Chevron, ExxonMobil, Occidental Petroleum.<\/p>\n Recession in Europe<\/strong>\u00a0 has already lowered expectations for McDonalds, Nike, and Ford.\u00a0 With demand\u00a0collapsing in parts of Europe, corporate commentary will be very interesting.\u00a0 \u00a0Some important early results: Coca-Cola, Marriott, Intel, Google, Eaton, Honeywell, and United Technologies.\u00a0 Alcoa\u2019s comments on global demand for aluminum (used in autos, aircraft, and gas turbines) are always useful.<\/p>\n Slowdown in China<\/strong>.\u00a0 Results of Alcoa, Coca-Cola, Intel, Yum Brands, Wynn, United\u00a0 Technologies, and Caterpillar are key.<\/p>\n Strong Dollar<\/strong>.\u00a0 The Fed\u2019 s \u201ctrade-weighted\u201d dollar index rose 5.6% yr\/yr in Q2, much stronger than the 1.1% in Q1 and the most since Q3 2009. This is a negative for all multinational firms, because foreign revenue and profits translate into fewer dollar.\u00a0 Currency effects will also have a fairly big impact on Q3 guidance.\u00a0 Reports to watch: IBM, Johnson & Johnson, Coca-Cola, United Technologies and Mattel.\u00a0 (A strong dollar eventually will hurt exporters, but not for many months.)\u00a0 Foreign sales are about 32% of S&P 500 revenues, not 46% as The Wall Street Journal<\/strong> recently wrote, drawing on faulty research by Standard & Poor\u2019s.<\/p>\n Positives in Q2 Profits<\/strong><\/p>\n Domestic profits have good momentum (remember Q1 earnings season was good) and the U.S. economy continues to grow<\/strong>, albeit more slowly than we would like.\u00a0 The difference between monthly job creation of 80,000 and 150,000 is a big deal politically but not for corporate results.\u00a0 Companies have figured out how to prosper in a soft economy by keeping costs low, inventories lean, and capital spending in check.\u00a0\u00a0Although Q2 domestic results should be okay, the big question is how much business has softened recently.\u00a0 Key\u00a0 reports:\u00a0 Alcoa, Marriott, Harley Davidson, Grainger, \u00a0Darden Restaurants, PPG, Fastenal, and domestic\u00a0 commercial banks (Wells Fargo, U.S. Bancorp, PNC).\u00a0 Pay particular attention to what the banks have to say about loan growth and credit quality.<\/p>\n Apple\u00a0<\/strong>typically delivers a big upside surprise.<\/p>\n Share buy-backs<\/strong>.\u00a0 S&P says they have slowed recently, but with stock prices weak companies are getting a bigger bang for the buck.\u00a0 So declining share counts will drive some upside surprises.\u00a0 Analysts tend to be conservative on their share count assumptions, because they don’t want this hard-to-forecast variable to drive their models.<\/p>\n","protected":false},"excerpt":{"rendered":" Wall Street strategists are forecasting 2012 S&P 500 EPS of $100-$105.\u00a0 After fairly good first quarter results, their estimates edged up toward $105, but macro deterioration has brought\u00a0numbers down to around $103.\u00a0 My guess is that ultimately (i.e., next March) … Continue reading