S&P 500 Earnings: Decreasing Revenue Indicates Worst Is Yet to Come

Below are the latest S&P 500 reported earnings as of the close of business on 4/21/09. Click here to access:

STANDARD & POOR'S INDEX SERVICES

S&P 500 Q1, 2009 EarningsAlert

108 reported issues representing 29.7% of the S&P 500 market value.

Operating estimates are from S&P Analytical Services. Actual operating, as reported and sales are from S&P Compustat. Issue level data includes restatements.

click to enlarge

Here is what the Howard Silverblatt, the S&P Senior Index Analyst has to say about reported earnings so far:

108 issues (29.7% market value) reported: the good news is actuals are 19.6% ahead of estimates, the bad news is they are -17.8% behind last year. 23 Fin'l issues estimated to contribute $0.26 to index->actual $0.77 operate ($0.37 As Rpt), many items, notes, 'complicated reading'. MS reports $-0.57 loss (more items: tax gain, bond prices) vs $1.27 Q1,'08; Fy chg Dec,'08@-1.62, cuts div (yesterday BK&KEY cut div; both had lower EPS). GS changed fiscals: 3MoMar,'09@$3.48 vs. 3MoFeb,'08@$3.39, but Dec,'08(lost in the shuffle) was -$2.15. Q1 estimated to be down -26.1%, ex/Financials it is down -35.2%; read company notes for presentation and assumptions. Health Care will contribute 24.3% of the Q1 earnings; small Y/Y gain of 7.0%, but it's all relative. Health Care [was the] only sector to post positive EPS gains each Q since the market highs. Consumer Staples expected to post lower EPS (-6%), but EPS have been 'relatively' good over period. Sector continues to pay and increase dividends, now accounts for largest share of dividends 16.9% (Financials were over 30%, now 9.6%). Q1,09 estimate continues down: at Dec,'08 was $18.16; Mar,'09 was $12.88; 'stabling' at $12.29 with help from Fin'l (2009: $81.80, $61.95, $60.26).

In terms of the current stock market rally, my take is that the investors have been caught up in the positive spin of actual reported earnings being ahead of estimates. However, we know that estimates currently used by Standard and Poor are highly questionable and here I am in agreement with Lee Eugene Munson:

They expect corporate earnings to continue with a slow climb throughout 2009, leading to a significant rebound in the trailing P/E in the fourth quarter, once 2008 losses are completely purged from the system. S & P’s scenario seems to assume that, once the 2008 losses are absorbed, a sort of muted business-as-usual will take over. Indeed, the earnings recovery being predicted depends upon the absence of further large losses, particularly in the financial sector, which will not only avoid losses, but will continue to increase earnings into 2010. If only we could agree with this analysis. We see too many dangers ahead for the financial sector to put much stock in the rosy picture Standard and Poor’s is painting.

One of the dangers I can clearly see from the reported numbers above is the decrease in year-on-year reported revenue. Out of the 108 issues that have reported, only 23 issues had an increase in revenue and this includes 5 financials who had government help. There is only so much cost cutting you can do to prop up earnings on a short-term basis. After that, earnings have to fall to reflect decreasing revenue. Once the market wakes up to this fact, expect a retreat from current levels and a retest of the March lows.

Comments

[Jasper M:]

"the bailouts and stimulus showing signs of working"
Said bailouts and stimulus "work" by encouraging ever greater levels on malinvestment, which will require greater and greater levels of government intervention to sustain. The malinvestments will be less and less competitive, less and less survivable, pay off less and less of the credit they have accepted, and thus destroy ever more credit.

And every program to oppose these market forces will require either ruinous taxation, or debasement of the currency. Or both.

It's kind of like treating a sick dog with steroids - he'll be able to run to his own funeral.

Apr 26 03:00 PM

[dcb:]

here you go Cetin,
Even Larry Summers says you are wrong.

Summers Says U.S. Economy to Decline ‘For Some Time’ (Update2)
Share | Email | Print | A A A

By Matthew Benjamin

April 26 (Bloomberg) -- The U.S. economy will continue to contract “for some time to come,” said Lawrence Summers, director of the White House National Economic Council.

“I expect the economy will continue to decline,” with “sharp declines in employment for quite some time this year,” Summers said today on “Fox News Sunday.”

The International Monetary Fund, which held meetings last week in Washington, cut its forecast for each of the Group of Seven economies for this year and next. The lender said the U.S. economy would shrink 2.8 percent this year and have no growth in 2010, with unemployment rising to 10.1 percent.

Summers said the economy will pick up as manufacturers rebuild depleted inventories and consumers replace aging cars. “These imbalances can’t continue forever,” he said. “When they are repaired they will be a source of impetus for the economy.”

Texas Instruments Inc., the second-biggest U.S. chipmaker, said April 20 that customers have begun to increase orders after reducing inventories.

Summers said the Obama administration is “on a path toward containment and toward building a path toward expansion,” he said, adding that “even sharp plans take time” to work, perhaps six months or more.

Stress Tests

Summers reiterated the administration’s assertion that “the vast majority of banks in the U.S. are well capitalized.” Regulators have conducted stress tests on the 19 largest banks to determine whether they need more capital and are discussing their findings with bank officials this week.

“There’s work that needs to be done,” to fix the ailing financial industry, including raising capital and providing additional government money to banks “where necessary,” Summers said.

“We’re going to be in a good position to provide the support and set the framework in which the banking system can move along the process of recovery,” Summers said.

Results of the stress tests are due for publication on May 4. Valerie Jarrett, a senior adviser to President Barack Obama, said Americans shouldn’t “pre-judge the outcome” of the tests.

“Whether management changes occur, whether banks are asked to raise more capital, all of that’s going to come forth in the coming week,” Jarrett said on CNN’s “State of the Union” program today.

Chrysler Deadline

Summers said he was hopeful that Chrysler LLC, facing an April 30 deadline from the Obama administration to come up with a viable reorganization plan or face bankruptcy, would succeed in negotiating an alliance with Italy’s Fiat SpA.

“It’s in everybody’s interest, we believe, to see these negotiations succeed, and we’re hopeful that they will,” Summers said. “It’s obviously a situation that we’re monitoring carefully, but it’s a negotiation between Chrysler and its potential acquirer, Fiat. There are important issues with creditors, with a range of stakeholders.”

He wouldn’t rule out bankruptcy for Chrysler, saying such a move wouldn’t mean liquidation but instead a “change in legal form” for the automaker to allow it “to function more effectively.”

“You can’t have a situation in which companies proceed on a permanent basis relying only on cash from the government,” Summers said.

Summers said the White House is working with credit card companies toward “provisions that would protect consumers.” If legislation the administration supports is passed, “you’ll see benefits to consumers that would come very quickly.”

To contact the reporters on this story: Matthew Benjamin in Washington at [e-mail]



On Apr 26 03:04 PM Cetin Hakimoglu wrote:

> The stimulus and bailouts work by improving investor & business
> confidence, while providing incentives for innovation in the from
> of tax cuts. My only complaint is that there weren't enough tax cuts,
> especially for the top earners who are the most deserving of it.
> Some companies are too big to fail.

Apr 26 03:49 PM

[logicalman:]

i forgot to remind all to buy the dips...there is bound to be some as always!!!

Apr 26 04:07 PM

[abetterplace:]

Opinions are like, well you know, and everybody has one.
Is the glass half empty or half full?

"08 issues (29.7% market value) reported: the good news is actuals are 19.6% ahead of estimates, the bad news is they are -17.8% behind last year"

Well, what did you expect, to make a full recovery in one quarter. Give me a break, and probably plenty of "thumbs down". You "Doom and Gloom" proponents are certainly giving it your best, but "spreading the wealth around" might be harder to do than you think.

Apr 26 06:41 PM

[William Cowie:]

Worst is yet to come? Well, yes and no. Earnings are judged against prior year numbers. Down 50%, down 30%, down 60% are what we're seeing. However, the recession started in the middle of last year.

What that means is as early as Q2, but more likely by Q3 and Q4, the comps are not going to be looking quite as bad. We might, for instance see company X reporting revenues and earnings for Q3 dead even with last year. That will cause many observers to proclaim "the recession is over." We know one bad year being equal to a previous bad year doesn't mean the recession is over, but that's how it will sound, and we all know the spinmeisters will milk that for all it's worth.

Just a heads-up.

Apr 26 07:15 PM

[Jasper M:]

"The stimulus and bailouts work by improving investor & business confidence, while providing incentives for innovation in the from of tax cuts"
Confidence is only relevant Until loans are repaid . . . or Not repaid. Confidence, absent ability to perform, is a facilitator of Failure. Thus, the stimulus encourages confidence in higher and higher rates of doomed malinvestment.
As I explain in depth on my blog . . . . oh, wait, no, I'm not the one who does that . . .

dcb, while I thank you for the support, and excellent prose, Larry Summers was probably not the best choice as an authoritative source.

Apr 26 07:34 PM

[cameroni:]

You are one of a kind Cetin. I mean that.

Some days I wonder if you really believe what you are writing or if you are just playing the devils advocate and getting under the skin of the Bears for a lark. You seem to thrive on negative feedback. You have found something that you are the best at,...even the leader, and that is all the negative reaction elicited by your ideas.

You have a place here though. It is good to challenge the negative sentiment towards the market now, makes us all think harder about our own belief system and forces us to clarify our positions on the future of the market. And even though I disagree with most of your commentary I have to admit that you have been right these past few weeks.

I don't think it will stick though. I kinda wonder what you will be saying after the next big down-leg correction. Will you still be the ultimate optimist or will you change your tune a little after a few humbling losses?

Watching and waiting for you to eat some of your words..

Cam

Apr 26 09:07 PM

[bricki:]

There are plenty of uncertainties about the future of the US economy. Inflation, further deterioration of the real estate markets, both residential and commercial, large spending deficits, loss of economic efficiency in key sectors due to government meddling, large industrial bankruptcies, tax increases by states strapped for money and high unemployment are some.

But the idea that future economic pain can be predicted from changes between this quarter's revenues and the previous year's same quarter revenues seems like a logical error. That is a backward looking indicator - by the time this quarter's results are compared with the same time next year two years will have passed.

Apr 26 09:23 PM

[Jasper M:]

Cameroni:
At least one commenter (and a well thought of one, judging by his rating) has opined that Cetin is actually a prank/class project of some students at a college he is familiar with.
Trying to stimulate aversion? Provoking word count?
It would explain most of the observed behaviors.
But I am slow to assign to conspiracy what can be adequately explained by a poor education.
Time will tell.

Apr 26 10:50 PM

[Moon Kil Woong:]

If you cut out bank earnings which are not the same accounting wise YoY so should not be compared the reported earnings look even worse.

The market is grappling with its own version of the pig flu. It started with greedy financial institutions lying about losses and has now spread to the general market. Where is CDC for this virus?

Apr 27 01:43 AM

[Fred Voetsch:]

Let's go right to the horse's mouth:
www2.standardandpoors....

S&P says this:
"138 issues (38.23% mkt val) rptd: the good news is actuals are 16.5% ahead of estimates, the bad news is they are -29.9% behind last year"

That contrasts with your older data which states:
"108 issues (29.7% market value) reported: the good news is actuals are 19.6% ahead of estimates, the bad news is they are -17.8% behind last year."

As is usual the companies with good news tend to report earlier and we see that trend clearly here. Likely we will finish around 35-40% lower than a year ago.

Now ask yourself why The Wall Street Journal and Bloomberg are both reporting a P/E or 13 for the S&P 500 when in fact the current PE ratio, based on Q4, as-reported earnings are 55+. Who can you trust these days as the government hands your money over to the biggest losers, liars and cheaters in history and the media shills the market for them?

Apr 27 03:35 AM

[AndrewBaker:]

There's very few of us can both do the numbers and get them right as well, so we tend to rely on numbers produced for us. What we can all do though, is get a feeling for what is really happening out there: and that is bad news. We know the politicians, big business CEO and media are rooting for a recovery (as we all want too), but we also know jobs, homes and money are all being lost still, and no matter how figures are massaged, companies are also finding times hard. So, even allowing for markets to be leading indicators, this current rally is still within the bear market and not the start of a bull: expect stock prices to fall back soon, and "sell in May" should well be headed this year particularly.

Apr 27 01:15 PM

[Fred Voetsch:]

On Apr 26 02:48 PM Cetin Hakimoglu wrote:

> I would take the current S&P earnings number with a grain of
> salt.


You have to, Cetin...you have to.

I think you better get more salt, though. Have a look at the Dow Indexes and their P/E's over at the Wall Street Journal:

online.wsj.com/mdc/pub...

Dow Industrials have a 36.56 PE
Dow Transportation Index has a 54.02 PE

Notice the outright lie posted by the WSJ and Birinyi Associates in regards to the S&P 500 PE. Birinyi Associates is a company that manages investments and has a clear conflict of interest and shouldn't be supplying earnings data.

Now grab your salt shaker and mosey on over to
www.bullandbearwise.co...

...where you will see that the NASDAQ 100 has a PE of 54.

Now P/E ratios are sometimes high even when the stock market is ready to climb, but we are obviously in a secular bear market and secular bear markets are all about revaluing the stock market after decades of overvaluation. In every secular bear market you will see P/E ratios close to historic lows, likely for years before the market is repaired and rebounds for the long term.

...but yeah, this time will probably be different....

May 06 03:05 PM

[SeekingTruth:]

This market reminds me of the race to the top of the Donner Pass before Winter sets in (again).

The stakes are very high and , if wrong, one could lose more than just money, i.e. college tuition for the kids , and maybe that retirement before age 65, etc, etc..

The Roubini/ RGE Moninor estimate of 3.6 Trillion dollar losses of assets is indeed sobering.

Most would be well advised to at least consider the market valuations and the great current and future performance required to justify them.

If you believe in everything going just right is in the cards (no room for error or setbacks), then all the new found optimism may be justified.

If you think there might be more , speedbumps, bruises , and setbacks lurking out there, then a little caution might be in order.

May 06 07:31 PM