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I would say a little bit of both – earnings will likely turn out on the lower side in the third quarter, but are most likely on the higher side for the fourth quarter and beyond. Expectations for the third quarter seem fair. But given management’s track record of under-promising and over-delivering and sell-side analysts’ gullibility to go along with it, we will likely see the expected decline of 3.4% to be on the low side.
The third quarter earnings decline is broad-based, with half of the 16 Zacks sectors showing negative year-over-year comparisons, though the weakness is particularly significant in Energy (-24.9%), Basic Materials (-22.3%), and Autos (-21.9%). Among the positive growers, Finance earnings are expected to be up 15.5%, while the Construction sector will see a 42.3% earnings gain. Excluding Finance, total earnings would be down 6.7%.
But even more striking that the negative third quarter growth rate is the expectation for the following quarter – the fourth quarter of 2012. Unlike what we saw in the second quarter (+4%) and is expected in the third quarter (-3.4%), the fourth quarter is expected to bring earnings growth of 7.9%. Easy comps account for part of this fourth quarter growth projection. But the biggest driver seems to be this expectation that the relatively soft economic backdrop of the last few quarters is a temporary phenomenon and ‘normal’ growth resumes from the fourth quarter onwards.
Maybe the sell-side research analysts whose projections these bottom-up aggregate growth rates reflect are onto something that the rest of us don’t know yet. But given what we heard from FedEx ( FDX - Analyst Report ) , Intel ( INTC - Analyst Report ) and Norfolk Southern ( NSC - Analyst Report ) recently, the odds are high that we will see the fourth quarter growth expectations come down significantly as the third quarter reporting season gets underway. That’s perhaps what will happen to expectations for next year, which is currently projected to have earnings growth of 12%.
- Getting ready for the start of the third-quarter 2012 reporting season, with total earnings expected to decline 3.4% in the quarter from the same period last year. This growth expectation reflects 1.4% drop in total revenues and a 16-basis point contraction in net margins. Total earnings were up 4% in the second quarter.
- Third quarter earnings would be even weaker had it not been for the 15.5% growth expected in the Finance sector -- one of only two sectors to have double-digit positive earnings growth (Construction is the other).
- Excluding Finance, total S&P 500 earnings would be down 6.7% in the third quarter, which compares to ex-Finance growth of negative of 1.4% in the second quarter. Easy comps at AIG ( AIG - Analyst Report ) and Goldman Sachs ( GS - Analyst Report ) account for most of the Finance earnings growth.
- Energy and Basic Materials have the weakest growth profiles, with Energy earnings expected to be down 24.9% and Basic Materials earnings down 22.3%. Both of these sectors were the weakest in the second quarter as well.
- Tech sector earnings are expected to be flat from the same period last year (up only 0.4%). This compares to growth rates of 7.4% in the second quarter and 15.5% in the first quarter of 2012. Excluding Apple ( AAPL - Analyst Report ) , Tech sector earnings are expected to be down 4.6% in the third quarter.
- Unlike expectations for the third quarter, estimate for the following quarter remain quite strong, with total earnings expected to be up 7.9% in the fourth quarter. Of the 8 sectors that are projected to have negative year-over-year comparisons in the third quarter, six are expected to turn positive, with Basic Materials and Autos as the most prominent. Energy becomes far less of a drag in the fourth quarter.
- Net margins are expected to be down in the third quarter, both year over year as well as sequentially. Ten of the 16 sectors are expected to see margins contract in the third quarter, including Tech. But margins are expected to improve back up in the fourth quarter.
- Total earnings for the full years 2012 and 2013 are expected to be up 6.7% and 12%, respectively. Revenues are expected to be essentially flat this year (up only 0.2%), but up 3.9% in 2013.
- The bottom-up ‘EPS’ estimates for 2012 and 2013 -- reflecting projections of analysts at brokerage firms covering individual companies -- currently stand at $102.95 and $114.91, respectively. The top-down estimates -- reflecting the projections of strategists at brokerage firms -- currently stand at $101.96 and $108.58 for 2012 and 2013, respectively.
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