Earnings: Prepare to be disappointed

Analysts aren't expecting much. Even so, one company is going to make the numbers appear much better than they really are.

By The Fiscal Times Jul 10, 2012 3:53PM
The Fiscal Times

By Suzanne McGee


A measly 5.7%. That's all the earnings growth we're likely to see for the just-ended second quarter of 2012, according to calculations by Thomson Reuters analyst Greg Harrison, based on analysts' predictions for companies in the S&P 500 index. After nearly three years of double-digit gains in earnings, 2012 is shaping up as a year of not only economic anxiety and market volatility, but also underwhelming profits.


Even worse, that expected 5.7% increase probably overstates the real gains we'll see as the second-quarter earnings season gets underway.


Alcoa (AA) kicked things off Monday by reporting a net loss of $2 million. Excluding special items, its operating profit came in at $61 million, or 6 cents a share -- better than analysts had expected.

But once the reports start rolling in, the reality is that a single company -- Bank of America (BAC) -- is going to make the numbers appear much better than they really are. That's because last year's second-quarter -- the period against which the percentage gain is calculated -- included a massive charge against earnings by Bank of America following a settlement of a lawsuit related to mortgage-backed securities. That is going to make the bank's earnings gain this quarter look astonishingly good, when really that increase will simply reflect the lack of extraordinary charges.


Indeed, Harrison calculates that removing Bank of America from the equation brings estimated earnings growth to a measly 0.6%. In other words, analysts are predicting that as the numbers are made public over the next five weeks or so, we'll see that profits barely grew at all.


With the steady drip of underwhelming news about the economy offering one headwind for stocks, and developments in Europe's sovereign debt crisis a reliable source of turmoil and anxiety, the lack of earnings growth -- if it materializes as expected -- is going to knock the final prop from underneath stock prices.


True, stocks right now are trading at remarkably low valuations: The S&P 500 commands a price-to-earnings multiple of only 12, compared to a ten-year average of 14.3. But investors are nervous -- and without a reason to drive up those valuations, in the form of either a strengthening economy or more robust earnings, odds are that they'll stick stubbornly to the sidelines.


That's not to say that there won't be some positive earnings surprises in the coming days -- perhaps even some astonishingly large ones. Apple (AAPL) has a habit of downplaying its expected growth and then delivering a big surprise; Netflix's (NFLX) CEO proclaimed on his Facebook page last week that the company had delivered a billion hours of streaming content to its subscribers last month, confirming newfound optimism on the part of analysts that it may generate a profit for the quarter rather than a loss.


And companies that have announced their results for the quarter in what has been dubbed the "preseason," have reported earnings growth of about 8%, Harrison calculates. Of the 25 companies that did so, 64% announced positive surprises, compared to the long-term average of 62%.


That still isn't as good as the recent beat rate of 68% for preseason announcements -- and a "positive" earnings surprise can still turn out to be underwhelming, given the increased tendency of both analysts and companies to talk down expectations. After all, the more the more successfully they jawbone, the more likely that the figures they actually report will turn out to be a positive rather than a negative surprise, and have the potential to translate into a boost for their stock price.


It seems likely as if it's all going to come down to a question of who investors believe -- and whether they are willing to react as predictably to the smoke and mirrors game of expectations versus reality that tends to characterize earnings season.


There are plenty of problem areas for companies trying to boost their earnings, most notably the lack of economic growth and demand. (Retailers reported very meager growth in same-store sales for June, another warning sign that consumers are starting to take a more conservative attitude toward spending.)

Almost the only positive note is that energy prices have slumped since their highs of early this year, meaning that companies whose major expenses include gasoline, jet fuel or other kinds of raw materials will benefit from a welcome decline in those costs. On the flip side, it also means that the materials sector of the S&P 500 is likely to see earnings decline by more than 12%, according to analysts' estimates compiled by Thomson Reuters.


The next few weeks will generate a lot of headlines and a lot of data points. We'll probably get some more insight into just how large the impact of the London Whale's trading will be for JPMorgan Chase (JPM) when the bank reports its second-quarter results at the end of this week. (And we should also get a sense of how strong the pressure is for the bank's CEO, Wall Street wunderkind Jamie Dimon, to follow the lead of Bob Diamond of Barclays (BCS) and fall on his sword to atone for having either condoned the trading or failed to notice what was going on.)


Those types of company-specific data points will likely be the most helpful to investors. Does it help to know that health care companies may see earnings remain flat, while energy companies could see their earnings plunge 15.3%? Sure -- but what matters just as much is identifying the outliers; those companies that are able to do better than expected and better than their peers. And, of course, to identify those who are about to blow up, spectacularly, reporting losses of a magnitude that even the most bearish of analysts couldn't have imagined.


In a slow-growth environment, when that sluggishness is a feature not only of the broad economy but also of corporate profits, spending more time on company-specific research will prove vital to stock market success.


Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' free newsletter.


More from The Fiscal Times:

Jul 10, 2012 10:31PM

How can anyone expect companies to have decent earnings numbers when there are so many unemployed people who have no money to spend beyond necessities. In addition the people who do still have a job are rat holing their money just in case.

Nothing is going to change untill some positive steps are taken to get people back to work. None of these positive changes can be realized until congress stops the partisan bickering and animosity and acts in the best interest of the people.

Don't hold your breath!!!!


Jul 10, 2012 5:57PM

Bank of America's revenue stream faces another challenge related to overdraft fee reform, TheStreet.com reports.  The bank stands to lose as much as $480 million in annual revenue from new rules expected from the Consumer Financial Protection Bureau, the website reports, citing an analyst report from Deutsche Bank.


Why anyone would do business with the bank is beyond me.  They are a total joke and the stock should be at around $3/share. 

Jul 10, 2012 9:40PM

So......I do not understand this article. Did we all not vote in a change. We hated the way the country was going. Now all is good. Wait until the O bomb ah so called health plan takes effect in 2014. People are paying 85% tax on SSN benefits. Add medicare to the equation. The Government lied! Our Supreme court bowed into poltical pressure. WHY did the SC not thorw back this tax bill to Congress and have them vote on it as a tax bill? National health care? How is this a National health care plan when it only affects 10% (30,000) of the population? Worse if those that fail to get a health plan, they will be FINED (penalty) at 2K a person! Why are so many excluded? (Pres, Vice Pres, Congress, Staff members, Armish, Muslims, American Indian, Christian Scientology (Hollywood), illegals. Did I miss anybody? Seems thsi Pres is dividing us than uniting us. I'm really seeing more color in our nation than I ever have and it saddens me.


Jul 10, 2012 10:19PM

prepare to be disappointed???!! oh no! ur kidding, wait! I know what to do! let's re elected a marxist, racist, anti semitic anti Catholic piece of crap black muslim communist pig like barrack hussein osama to fix everything that's broken as only a looney toone leftist can, of course I don't have to say what'll happen to the United States of America if we ever did! thank God's he's outta here in NOv.


Romney + obama = Reagan/carter redux, I sooooooooooooooo luv those numbers!

Jul 11, 2012 3:05AM

Mayday, mayday we're going down.

 But no worries, if you survive the crash you might have health care.

Maybe, or you can pay the penalty. Good luck finding a doctor.

What a waste of four years and a crisis.

Now what, rocket scientists!

Jul 10, 2012 10:01PM

Analysts are just that.....BLEEP ... ysts

they don't have a clue what to do with what's coming in because it all turn into S H I T...

Jul 11, 2012 7:16AM
Everything thats going on in the markets has been a con game with a huge sell off coming.  Just like the robber barons 100 hundred years ago set into motion. "The Federal Reserve Bank"  I think it was JP Morgan himself that started the first run on the banks. This was so he and the other greedy pigs could call in the markers. Then when people could not pay. They would buy the companies for penny's on the dollar.  Some things don't change. You have to know history so you won't be doomed to repeat it. STAGFLATION for YEARS to come behind the real bottom of the markets.
Jul 11, 2012 2:25AM
There is no place to diversify, there is no place to hide. Resistence is futile. US dollar is the place to be. Google for DEFLATIONARY CRASH KONDRATIEFF WAVE to understand why everything is going to fall against the dollar!! Stocks are a bubble, bonds are a bubble, commodities are a bubble, real estate is a bubble, debt is the biggest bubble of all.
Jul 10, 2012 9:53PM

Personally, I'm enjoying, how we're supposed to be disappointed. I mean was'nt this already supposed to be cost factored into the price of equities? I am of the opinion, we're going to see some more wild swings in the next few weeks, as some companies meet and beat, and others don't fair so well, and recognize as Cummins did, the world that they're facing in the next few quarters.

As long as the Spanish and Italian bond rates remain above/around 6%, and the Euro and other currencies continue thier weakening against the Dollar I forsee many portfolio's not doing too hot. Not to mention the amount of resources that China has stock piled, from Oil, Coal, Copper, to god knows what should alert people that perhaps commodities will shortly be in trouble aswell, and pray tell what Iran is planning to do with all thier oil, has that been built into the current prices?

The other concern I have is the old raise the dividend and bait some folks in that way too. Cummins did that today, raised thier dividend by 25%, that and the 9% loss on the day to take them to 86.91 at close was a deal too good to pass up, I felt like I had to get in, its for the very long term. unless it rebounds quickly :).

Jul 10, 2012 10:07PM
The author ?   of this article is Wrong, Wrong, Wrong !!  Earnings for the majority will be fine, and the BANKS' earnings will be great !!   Just watch and see Friday !!    And BAC is a Buy, Buy, Buy for all you BAC BASHERS and DEADBEATS !!
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