After third-quarter earnings reporting, during which profit growth is expected to turn negative for the first time since the financial crisis, most Wall Street strategists were hoping that the worst would be over, setting up for a nice rebound in Q4.
As it turns out, however, the negativity coming through so far in corporate guidance for fourth-quarter earnings is nothing short of "stunning," says National Bank Financial economist Matthieu Arsenau.
As the chart below shows, the ratio of negative earnings preannouncements to positive preannouncements for Q4 is at an all-time high:
Arseneau writes in a note to clients that given the data, it's unlikely that earnings will rebound in Q4: The stage had been set for disappointing results in Q3 by the highest ratio of negative to positive preannouncements since the 2001 recession (4.6), giving analysts good reason to revise down their expectations. While Financials posted interesting results in Q3, that’s not the case for others.
With 56% of non-financial corporations that have reported so far, earnings have surprised slightly on the upside but are down 3.1% from a year earlier. Based on bottom-up analysts estimates, this weakness is supposed to be a one–quarter event since earnings are expected to resume their uptrend and reach a new record high in Q4.
In our view, this is an unlikely scenario. As today’s Hot Charts shows, the ratio of negative to positive preannouncements reached an all- time high of 9.25 for Q4 (so far). That does not bode well for the remainder of the year in terms of earnings performance.
This ratio could improve a little in the coming weeks since only 45 companies made preannouncements. It remains that these preliminary statistics are stunning and suggest that Q3 weakness in earnings should continue until the end of the year.
Not good news for those who were hoping for a mere blip in the corporate earnings strength story.
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