CHICAGO, Feb. 21, 2014 /PRNewswire/ -- Zacks Director of Research Sheraz Mian says, "Part of the guidance weakness is likely a function of management's need for controlling expectations."
Earnings Guidance Remains Weak
Our overall verdict on the Q4 earnings season is that it is no better or worse than what we have been seeing in the last few quarters. In some respects, the Q4 earnings season is an improvement over the recent past. Specifically, total earnings for the S&P 500 are on track to reach a new all-time quarterly record and even earnings growth for the quarter is in on track to be the highest of the year (even after accounting for easy comparisons). Positive surprises started off on the weak side, but even those are running at the best pace of the year.
Revenue growth has been a challenge for companies for quite some time and we don't see any improvement on that front in Q4 either. If anything, the aggregate revenue growth rate at this stage is even weaker than what we have been seeing in recent quarters, though the bulk of the revenue weakness is due the Finance and Energy sectors.
The most notable thing that hasn't changed at all from other recent quarters is guidance – it was weak before and it's still weak, as the guidance from Wal-Mart (NYSE: WMT-Free Report), Whole Foods (Nasdaq: WFM-Free Report), Deere & Company (NYSE: DE-Free Report) and Boeing (NYSE: BA-Free Report), just to name a few, shows. Part of the guidance weakness is likely a function of management's need for expectations management. The need for conservatism aside, one has to be extremely cynical to believe that management teams would guide lower while knowing that their business outlook was stable, if not improving. The chart below shows how estimates for the current quarter have fallen in response to weak company guidance.
With the Retail sector heavily represented in the still-to-come reports, it is reasonable to expect that estimates still have room to go down.
Companies have been guiding lower quarter after quarter, prompting earnings estimates to keep coming down for almost two years. The market didn't care much about this, with an ever helpful Fed not letting earnings-related worries coming in the way of the market's upward thrust. But the Fed has started getting out of the QE business just as these other issues have taken center stage.
The popular narrative connects the Fed Taper with what is happening in the emerging markets. The Fed doesn't appear in any mood, for obvious reasons, to adjust its Taper plans to accommodate the emerging economies. In fact, it is reasonable to assume that they don't mind the safe-haven trade keeping bond yields in check.
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