I wrote last week about the shaky start to the earnings season. That trend has continued this week and it is weighing on equity prices. Companies are beating on the earnings side (over 60% have beat earnings estimates), but revenue growth has been disappointing. As of October 19, only 42% of companies were beating sales estimates, the lowest percentage since the first quarter of 2009 (Source: FactSet).
In addition, forward guidance has been abysmal. Large companies, such as Caterpillar, DuPont and United Technologies, have been cautious on growth looking forward, both in the U.S. and abroad.* The number of companies delivering negative guidance is multiples of those offering positive guidance. Coming into 2012 companies had relied on margin expansion to grow earnings, but with margins at peak levels, revenue growth must follow in order to meet consensus growth expectations. This will be difficult to accomplish in this sluggish growth environment.
While the Fed has tried to boost liquidity and asset prices with more quantitative easing, investors seem to now be focusing on the fundamentals. The uncertain macro environment, including risks surrounding the U.S. fiscal cliff, Europe, and a slowdown in China, is beginning to flow through and impact company earnings. We expect growth estimates for 2013 to be downgraded in response.
*Individual securities listed are shown for illustrative purposes only.