What to expect from U.S. earnings season

Thirty-five of the S&P 500 companies have reported third quarter results so far. Half have had positive revenue surprises and 68% have had positive earnings surprises, about on trend with previous quarters.

This week, 82 companies are due to report including Citigroup, Johnson & Johnson, Intel, and Microsoft. As in the case of Alcoa, we think investors will zero in on both revenues as a function of the macro economy and guidance, which has turned rather dour in the past quarter.

So what’s in store for the S&P 500?

At the index level, top-line revenue per share should show modest sequential growth of 1.3% over the last quarter, and a year-over-year growth rate of 2.4%.

Bottom-line earnings per share for the index is currently estimated at $25.42. This is a 1.2% decrease over the Q3-11 number. The final number for Q2-12 was $25.66, implying a quarter over quarter decrease of 0.5%.

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This suggests analysts either have not fully factored in slowing growth in China and Europe or they are underestimating corporate America’s ability to deliver bottom-line growth in the quarter.

Earnings growth expectations for the third quarter began to turn negative as all the Q2 revenue misses began to pile up and as corporate guidance turned weaker during the last reporting season in July.

Many analyst estimates have been lowered in the past three months to the point where we would now not be surprised to see a decent percentage of companies able to post positive earnings surprises.

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At the sector level, the year-over-year growth rates for this quarter are expected to be negative in six out of ten sectors.

The highest growth rates are expected from Consumer Discretionary and Industrial stocks, while Energy and Materials are expected to have negative growth rates of -17% and -22%, respectively.

Technology and Financials have positive earnings growth expectations at 2.1% and 1.4%. In light of the 6.4% move higher by the S&P500 in the past three months, we believe investors will focus in on both revenues and any corporate guidance given on conference calls.

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In the past three months, only 47 companies issued positive guidance, while 108 companies issued negative guidance.

The pattern of “guide negative, beat positive” should continue this quarter.

David Andrews is the Director, Investment Management & Research at Richardson GMP in Toronto. This team of research experts is responsible for monitoring and interpreting economic, geo-political situations, current market environments and trends. @David_RGMP