Mind The Non-GAAP: Real S&P Earnings Are The Lowest Since 2010

We have previously documented how, with the fourth quarter earnings season almost completed, Q4 EPS are poised to drop by 3.3% Y/Y, making this the third consecutive quarter of declining year over year earnings, in other words an earnings recession and a half.

And with this quarter’s earnings almost done, attention shifts to Q1 2016 where things are going from great to bad to absolutely abysmal. Here, it appears that Wall Street was just a “tad overoptimistic” on first quarter’s earnings, as consensus has imploded from a +5% expected increase in YoY EPS as of September 25, to a -7.4% plunge according to Factset (and even worse according to Bloomberg).

The companies have validated this implosion in earnings: for Q1 88 companies have issued negative EPS guidance and 22 companies have issued positive EPS guidance. Additionally it’s not just energy: in Q1 the following sectors are expected to post annual EPS declines: Energy (-92.8%), Materials (-19.5%), Industrials (-10.9%), Info Tech (-7.3%), Financials (-4.3%), Consumer Staples (-2.6%), and Utilities (-0.2%). In fact, only three of ten sectors are expected to see their EPS rise: Healthcare, Consumer Discretionary and Telecom Services.

SocGen’s Andrew Lapthorne had some thoughts on this last week saying that “forward earnings expectations are now falling fast, so while MSCI World has fallen by around 15% since May last year, 2016 EPS levels are now down 12% over the same period. The poor profit reality is now catching up with weak equity prices.”

What seems to be happening is that the Q4 reporting season is leading to significant cuts to 2016 expectations. Whilst similar effects occurred last year, this is somewhat of a departure from the past when year-ahead forecasts tended to be cut steadily throughout the year. It would appear the perennial bullishness in forward consensus numbers is so out of kilter with economic reality that companies are moving earlier to correct the anomaly to the extent the consensus growth forecast for this year is already fast approaching zero.

Whilst a big part of the downgrade is via the Oil & Gas sector, [there are] big cuts in an ever wider selection of stocks and sectors. Global 2016 EPS forecasts were cut by 3.6% in over the last four weeks or so: we make that the worst monthly cuts to forward estimates since early 2009.