Corporate earnings update – S&P 500 earnings growth has slowed to zero – is q3 ’12 the bottom for earnings ?

The forward 4-quarter estimate for the S&P 500 slipped to $109.01 this week, (per ThomsonReuters), but remains above the final estimate  for June of $107.25, and continues to be close to the all-time high of $111.88 set the week of July 13th, 2012 despite the headwinds of Europe, and an uncertain business climate here in the US.

In q1 ’12, most of the commentary around the 1st quarter’s 8% year-over-year earnings growth for the S&P 500 was that Apple was such a big part of the q1 ’12 increase, but we heard very little this week about the Apple miss and the fact that q2 ’12 earnings are now expected to grow 6.2% year-over-year, versus 6% on July 1. (Excluding Bank of America  and the financial sector entirely, S&P 500 earnings are expected to grow -0.4% in q2 ’12.)

The point being that – even with the Apple miss – q2 ’12 earnings are coming in better-than-expected as we thought they might over the last few weeks.

Here is how q2 ’12 growth estimates by sector have changed, from July 27th and then back to July 1 (the start of the quarter):

Financials  +58.1% from 55%

Industrials  +15% from 10.2%

Technology +7.9% from 7.8% (despite the big miss by Apple, growth is still higher)

S&P 500 +6.2% from 6%

Telecom +6% from +0.9%

Cons disc +3.8% from 3.5%

Cons staples +2.1% from +1.5%

Hlthcare +2% from +0.1%

Utilities  -14.2% from -17%

Materials  -15.9% from -11.8%

Energy  -20.7% from -14.7%

The sectors that – coming into the quarter – were projected to have positive y/y earnings growth, have seen growth estimates taken higher, while the sector with negative expected growth have gotten worse (i.e. the China trade which is Energy, and Materials.)

Utilities i’m still very puzzled by, in terms of the sector action relative to earnings growth.

Telecom was a positive surprise for the quarter. I think AT&T’s and VZ’s earnings were well received by the Street.

What does the 3rd quarter hold for S&P 500 growth estimates ? Current projections for the S&P 500 are that y/y growth will slow to -0.4%, exactly where q2 is now ex financials, and why we think q3 ’12 could be the bottom for earnings.

With the 2nd and 3rd quarters of 2012, S&P 500 earnings growth will be barely positive, and i believe will represent the trough in earnings from the post 2008 recession boom. Financials will return to a more normalized 5% y/y growth rate, in q3 ’12 since there wont be the one-time issues from 2011, but more importantly, financials are still expected to grow faster than the S&P 500 as a whole.

Given the level of pessimism we saw coming into earnings season, expecting a bounce wasn’t that hard of a call. Historically in election years, per Bespoke, the market continues to rally right into year-end, but the fiscal cliff complicates the issue this year.

Revenue growth for q2 ’12 is still +1%, about where it has been the last few weeks.

So why has the stock market held up so well the last few weeks ? Check our trading update which follows.

Next week, we’ll chart the pattern of S&P 500 earnings off the March ’09 market bottom, and dig into the revenue numbers for some clarity.


Trading update – people forget that the S&P 500 is a “market-cap” weighted index, and one of the reasons that the market remains strong, despite the plethora of issues we hear about daily, is the resurgence, in large-cap and mega-cap stocks. We touched on this last week, but the topic was covered more thoroughly in the Sunday New York Times by Paul Lim, in his “Fundamentally” column. Per Paul, since the start of the year the Russell Top 50 stocks are up 14%, versus the S&P 500’s roughly 8% – 9% return.

Look no further than Walmart, the $252 bl market cap retail giant – we blogged about it months ago and gave readers a chart. The breakout was the trade over $70.25. The stock is currently badly extended technically, and has been rising on light volume, but check our earlier blog posts on what could be driving WMT’s resurgence. WMT reports mid-August – I just wish the stock would corrrect and re-test that January 20th, 2000 $70.25 high. (That would be a safe, low-risk entry to get long more WMT.) (We are long WMT, and want to get longer.)

GE got some nice play this week, after reporting earnings, on Friday, July 20. The $221 bl market cap industrial and financial conglomerate is STILL trading at just 1/3rd of its mid-September 2000 peak of $60.75, and is still trading below the price where Warren Buffett made his preferred stock investment ($22 i believe). (Long GE)

Large-cap pharma: Pfizer reports Tuesday morning, July 31 and sports a $178 bl market cap, while Merck reported last week, rose nicely after earnings and sports a $137 bl market cap. (Check our earnings preview for Pfizer, over on Seeking Alpha ( It was just published on Sunday, July 29th. (Long PFE and MRK.)

Finally, how about IBM and Coca-Cola, a $223 bl market cap technology company and a $180 bl consumer staple, both of which are near an all-time high. IBM is closer to its all-time high, but Coca-Cola, topped out in August, 1998, just prior to the LongTerm Capital debacle, at $88 per share, and looks to be ready to make a run at that price level. KO will split their stock 2-for-1 on August 10th – my guess is that KO makes an all-time high before calendar year-end 2012. (Long IBM and KO.)

If you are feeling nostalgic about this market, it is that the sector leaders of the 1980’s and 1990’s are starting to show some signs of life, after being left for dead for years, and i’m really talking large-cap healthcare like Pfizer, Merck, and Johnson & Johnson. (Long MRK, PFE and JNJ.)

Our three largest sector overweights remain technology, financials and industrials. We are boosting healthcare’s weighting too. Industrials in my opinion offer great value, names like Boeing, United Technologies, and FedEx, even GE. (Long BA, UTX, FDX, GE)

Our worst decision the last 18 months was having very little in utilities, and telecom, two very strong sectors for a while now. (Long small amount of T.)

We could have had a key “outside reversal” day in the IEF on Friday, the 7 – 10 Treasury ETF. The 10-year Treasury yield backed up suddenly in the back half of last week after hitiing an all-time low yield during the week. That would be very good news. (If you arent reading Gary Morrow, the superb technician over at in the RealMoneyPro section, and a long-time friend you should be.) (Long (TBF, TBT)

Also, high yield corporate bonds continue to remain well bid. Neither the HYG or JNK has hit an all-time high but on days when the S&P 500 is down ugly, I always look at the high yield ETF’s first and they show very little concern. Remember, credit is your early warning indicator. (overweight high yield in client accounts.)

There are more positives to this market than you think. No one out there is wildly bullish ( a good contrarian indicator), even though according to Bespoke, economic data this week was positive: of the 14 indicators released this week, nine came in stronger-than-expected, while four were weaker and one was inline. Per Bespoke in their weekend review, “we dont remember any week in the last few months where the pace of economic beats was this strong”.

The July payroll report is Friday morning, August 3rd and consensus is around 100,000 jobs created, versus the 80,000 from June. The central banks meet this week including the Fed and the ECB. Check Jeff Miller’s “A Dash of Insight” as of Friday for insightful commentary on media punditry around the Fed. Most of it is bad.

Thanks for reading. Check back during the week as we develop more topics.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager



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