Investors got a bit more sour news Monday morning when Caterpillar (CAT) missed on the topline and cut its 2012 guidance citing a difficult economic environment both in the U.S. and abroad. Call it an overreaction if you will but CNBC's John Melloy (executive producer of the network's Fast Money program) coined a new buzzword Monday afternoon: "The Earnings Cliff."
Citing Goldman Sachs' chief equity strategist David Kostin, Melloy notes that 18 out of 20 of firms issuing guidance for the fourth quarter have cut their outlook. Melloy writes that
"...a 90 percent negative run rate [is something] many investors and analysts have never seen before."
The following chart from Morgan Stanley is particularly instructive. It shows that negative guidance is running at its highest level in five and a half years and is well above average:
(click to enlarge)
Source: Morgan Stanley, Factset via ZeroHedge
Perhaps more surprising (and more disheartening for the bulls) is the following graphic which shows where all the strength has been coming from this earnings season:
(click to enlarge)
Source: Morgan Stanley, Factset, via ZeroHedge
As you can see, financials, Johnson & Johnson (JNJ), Intel (INTC), and UnitedHealth (UNH) have accounted for the entirety of the earnings beat thus far. This is especially unfortunate given the rather suspect character of some of the earnings reports from the big financials. When you look at the break down in the graphic above, financials have accounted for fully 85% of the earnings beat this quarter.
Meanwhile, according to Barclays' "risk appetite index", investors have never been more willing to throw caution to the wind:
(click to enlarge)
Source: Barclays
Unbridled appetite for risk doesn't generally play well with negative guidance. Someone is right and someone is wrong and the market has apparently become so convinced that QE will keep everything afloat that investors are willing to bet money on companies whose CEOs are telling them that earnings are going to be lower. For his part, David Kostin sees the S&P 500 (SPY) falling 14% over the next three months.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
