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Wednesday, August 1, 2012

Earnings guidance

I thought this was an interesting chart from Bespoke Investment Group http://www.bespokeinvest.com/.

Here is what they said about it.

Bad Guidance Continues

Roughly 1,000 companies have reported second quarter earnings so far this season, and while the earnings beat rate has been average relative to prior quarters, guidance has been negative to say the least.  As shown below, the current spread between the percentage of companies raising guidance minus the percentage of companies lowering guidance is -6.38 percentage points.  If earnings season were to end today, this would be the most negative guidance spread since Q4 2008 when it was nearly -14 percentage points.  
We've now had four straight quarters where more companies have lowered guidance than raised.  This streak has come after we went nine quarters with a positive spread.  The only other period over the last 10+ years where the spread was negative for this many consecutive earnings seasons was from Q2 '02 to Q2 '03 (5 quarters in a row).

 I believe 1000 companies is a statistically valid sample size, so the final numbers are not likely to be too far off.  Clearly the slowdown has caught companies by surprise as they did not "manage" expectations very well. The other two times in the last decade the spread was this wide the market went down big time.  The market has taken this data pretty well so far.  It seems that people are hanging on hoping and praying for another dose of QE that will fix everything.  Analysts are still expecting double digit earnings growth in the fourth quarter.  With no sign whatsoever of a turn up in the global economy to date, that seems like a bit of a stretch.  The fundamentals of the market have clearly deteriorated and it seems likely that will continue into this current quarter.  Is there a risk that there will come a day when the market actually pays attention to it?


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