CHICAGO, Oct. 10, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "Global growth worries have started weighing on stock prices lately, prompting some to claim that the long-feared 'correction' has finally arrived."
Will Q3 Earnings Season Ease Growth Fears?
Global growth worries have started weighing on stock prices lately, prompting some to claim that the long-feared 'correction' has finally arrived. Hard to tell at this stage how enduring the current pullback will prove to be as other recent episodes of market weakness have been short-lived and shallow. Reports from the likes of Alcoa (NYSE:AA-Free Report) and Pepsi (NYSE:PEP-Free Report) appear reassuring enough on the growth question. But we will know better as the Q3 earnings season ramps up in the coming days will give the market a clear directional push one way or the other.
The low levels to which estimates have fallen gives companies an easy-enough hurdle to jump through. But that will hardly be new as roughly two-thirds of the S&P 500 members beat earnings estimates in the typical earnings season anyway. What will be new however is if we see any improvement on the guidance front, which has persistently been negative for quite some time.
Even modest improvement on the guidance front will reassure investors that questions about the growth outlook for Europe, Japan, China and elsewhere are not having a bearing on corporate profitability. Hard to imagine how guidance could become even worse than it has been in recent quarters. But any guidance deterioration will likely accentuate current global growth worries and serve as a fresh headwind for stock prices.
Estimates for Q3 came down as the quarter has unfolded, with current expectations of +1.6% total earnings growth in the quarter down from +6.3% growth expected in late June.
Estimates for most sectors came down, though revisions for the Consumer Retail/Wholesale, Finance, and Energy are the most pronounced. The Finance sector was relatively late to the negative revisions party, but Bank of America's (NYSE:BAC-Free Report) shift from estimates of positive 32 cents earnings two months back to a loss of 8 cents at present has been a big reason for the sector's weak aggregate growth numbers. The 40 cents negative swing in Bank of America estimates may not sound like much, but that's a actually a swing of a little over $4 billion in total earnings.
For a more detailed look at the Finance Sector earnings, please read the Finance Industry Outlook for Q3.
The last earnings season was a notable improvement over what we have been seeing in recent quarters, with growth and positive surprises, particularly on the revenue front, tracking above recent trend levels. The question is whether it was a one-off bounce from the anemic Q1 level or the start of something more enduring? We don't know yet, though the coming Q3 earnings season will give us a good sense of how to answer that question.
Estimates for the coming quarters remain high.
Recent history suggests that we should expect the 2014 Q4 estimate (+7.3%) to start coming down as companies guide along the lines of what they have been doing in recent quarters. That is exactly what happened in Q3 and has remained the enduring trend for more than two years now. It is possible that the coming round of negative revisions will be even bigger in magnitude as a result of the global growth worries. Market volatility has increased in recent days and the situation isn't expected to get any calmer this earnings season either.
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