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S&P 500 Q4 Earnings Preview: The Good And The Bad

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Earnings season is here once again. Beginning with a report from Alcoa Inc. (NYSE:AA) after the market closes this afternoon, firm after firm will deliver their performance figures from the fourth quarter of 2012. The overall results will give the market an image of the state of the economy at the end of last year, and will provide a glimpse into what 2013 holds. What are we expecting?

Analysts are not happy with the overall state of the corporate economy. There was a positive trend in earnings in the early part of 2012, but that leveled out in the second quarter and ended in a disappointing third quarter. The following chart shows consensus analyst estimates of earnings per share for the last 10 years for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).


The red line indicates the time weighted average of analyst estimates of this years and next years earnings. The chart, along with the others in this article, come from a report published by Yardeni Research.

Concentrating on 2012, and doing your best to avert your eyes from 2008/2009, you can see that estimates were increasing in the early part of 2012, but leveled off toward the end of the year. There was a slight pick up in the Autumn, but since Winter started there has been a significant flattening of the curve.

The trends in estimates for 2013, on the blue line, look worse, but they are not weighted and so are likely to be more extreme. The trend is still disappointing. Analysts are not optimistic about the economy, and that has reflected in their estimates for this particular earnings season. Earnings are not likely to show a meaningful recovery this time around.


The same trend can be seen in the revenue chart, featured above. Estimates have fallen off toward the latter end of 2012. Earnings estimates have not trended regularly upward or downward toward the end of the year, they have levelled off in a fugue. The same pattern can be seen in profit margin estimates, charted below.

S&P 500 Q4 Earnings Preview: The Good And The Bad

This effect is extremely pronounced when it comes to estimating how firms will perform next year. The following chart shows consensus estimates for each quarter of 2013, charted weekly throughout 2012. The pattern is not encouraging.

2Analysts do not foresee companies outperforming on earnings in 2013. This means the market, represented here by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is unlikely to outperform either. The coming earnings season is unlikely to bring a new golden age of economic prosperity with it.

That leaves the market, and the analysts, waiting for the Alcoa Inc. (NYSE:AA) announcement later today, hoping that there’s something they’ve missed. If the company reports a large positive surprise, analysts will likely up their estimates for a whole host of companies.

Alcoa Inc. (NYSE:AA) isn’t known for positive surprises, however. The earnings from the fourth quarter of 2012 will be more interesting in analysis of what firms blame their lackluster performance on. You can bet excuses like “European Worries” and “Fiscal Cliff”, will pop up in several reports.

The SPDR S&P 500 ETF Trust (NYSEARCA:SPY) grew by 13% in 2012. But 2013 seems to hold little more growth than its predecessor.

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