This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Market Preview: The Earnings Trap

NEW YORK ( TheStreet) -- Is it too early to start worrying about third-quarter earnings just yet? Apparently not.

With the major U.S. equity averages hovering at multi-year highs and quantitative easing all the rage among the world's central banks, questions about valuations are starting to be asked. After all, profits -- not bond-buying programs -- are historically the bedrock method for placing a value on a public company, and the expectations for the third quarter are ugly.

According to Thomson Reuters, the consensus view is for a year-over-year decline of 2.2% in earnings for the S&P 500 in the third quarter. That's down from an expectation for growth of 3.1% as of July 1. What's more, the firm says company guidance is the worst it's been in more than 10 years with negative pre-announcements outpacing positive ones by a 4.2 -to-1 ratio.

Nearly half (49%) of the companies issuing warnings cited Europe as a factor for their lower view while other reasons included the impact of the strong U.S. dollar, commodity prices and seasonality.

Citigroup observed Wednesday that there's no reason to expect all this liquidity being pumped into the markets by central bankers to flow to the company bottom lines anytime soon.

"With the help of the ECB and the Fed, global equity markets are now close to, or through, their highs for the year, the firm wrote. "While central banks have supported risk appetites, we are not sure they will be able to support corporate profits."

S&P Capital IQ was of a similar mind, asking how many bullish catalysts remain for stocks now that all the QE bazookas have been fired. With earnings growth stalling, the firm said the uptrend is relying on expansion of price-to-earnings multiples.

"[T]he Capital IQ consensus sees Q3 S&P 500 EPS falling 1.8% Y/Y, and while companies will likely again exceed a low bar, we think results will probably be subdued as will guidance," S&P said. And with the Street calling for an EPS growth acceleration to 10.1% and 11.8% in Q4 and CY '13, respectively, it's no wonder investors are antsy, especially given the anemic trends in European, Asian and to a lesser extent, U.S. economic data."

The firm, which has a year-end target of 1500 for the S&P 500, thinks mid-single digit growth in earnings per share in the fourth quarter and fiscal 2013 should be enough to allow stocks to continue to push higher "as macro uncertainty keeps receding from sky-high levels" and sees the upcoming U.S. presidential election as giving stocks a boost by removing another big question mark.

"The last 100 points of the S&P's rally have largely come from P/E expansion due to receding macro uncertainty in Europe and in Fed policy - not stellar EPS growth - and we see this macro-driven rally continuing with an end to electoral uncertainty on Nov. 6," S&P said. "Since 1900, 63% of all election year annual highs have come in November and December; since 1975 it's 67%. While history obviously isn't gospel, we think this year's abnormally high electoral uncertainty means ending it will likely allow 2012 to follow history's bullish script."

As for Thursday's scheduled news, Oracle (ORCL - Get Report) is slated to report its fiscal first-quarter results after the closing bell. The average estimate of analysts polled by Thomson Reuters is for a profit of 53 cents a share in the August-ended period on revenue of $8.42 billion.

The stock has done well in 2012, rising more than 25%, but it also hasn't been able to punch past a 52-week high of $33.81 that dates back to Oct. 27, 2011 and the forward price-to-earnings multiple of 11.3X is pretty low for a tech bellwether, illustrating there is still some reluctance to award the company much of a premium as it's been working through issues with its sales force over the past few quarters and facing heavy competition in the cloud.

The sell side is still predominantly positive on Oracle with 32 of the 44 analysts covering the shares at either strong buy (11) or buy (12) and the median 12-month price target at $35 but the stock
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
ADBE $94.22 0.62%
BBBY $47.22 -2.11%
ORCL $39.86 -1.17%
AAPL $93.74 -1.15%
FB $117.58 0.73%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs