If next week is the Super Bowl of Q4 earnings announcements, this holiday shortened week could be described as the championship week lead up. While Q4 results will capture the headlines, the news whether it be a slightly higher or lower beat rate is already “baked into the cake” so to speak with the S&P 500 less than 1% from the all time highs made last week. Forward guidance should for the most part be the determining factor for equity performance for the weeks to come.
On the guidance front, FactSet’s week Earnings Insight post dated Jan 17th, 2013 had some interesting commentary:
111 companies in the index have issued EPS guidance for the fourth quarter. Of
these 111 companies, 96 have issued negative EPS guidance and 15 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the fourth quarter is 86% (96 out of 111). This percentage is well above the 5-year average of 64%.
One of the reasons for the high percentage of negative EPS guidance is the unusually low number of companies issuing positive EPS guidance.
Over the past four quarters (Q412 – Q313), 86 companies on average have issued negative EPS guidance and 26 companies on average have issued positive EPS guidance. Thus, the number of companies issuing negative EPS guidance for Q4 is up 12% compared to the one-year average, while the number of companies issuing positive EPS guidance for Q4 is down 42% compared to the one-year average.
The largest take-away from FactSet’s data above is that there has been a fairly consistent trend over the last year of companies issuing downbeat guidance, hitting those estimates or coming in slightly above and then systematically lowering the next quarter’s guidance…wash, rinse, repeat. I don’t mean to suggest that there is any devious here, but what is obvious is that managements have had less visibility than in times past and have less confidence in offering optimistic outlooks. If this were to change for the balance of the earnings period, it may corroborate the FOMC’s recently upgraded view of the U.S. economy.
With stocks near highs, and valuations becoming stretched, conservative guidance makes a lot of sense to me at this stage of the game as there remains some fairly ominous economic cross currents at a time when the Fed is reducing stimulus. Incorporating recent data points, weaker than expected Dec Jobs, better than expected Q3 GDP, rising interest rates, slower mortgage originations, spotty retail performance and and an unexpected slowdown in auto sales, my sense is that the jury is still out on the pace of the recovery. One major data point to change the debate would be some sort of new found optimism among C-level executives willing to invest in their businesses as opposed to investing in their company’s stocks!