This should be put into context and feed into the full year consensus numbers of $118, which have remained fairly stable since around March.
In terms of this quarter, it’s worth pointing out that over the last few month we’ve seen nine out of ten sectors undergoing consensus earnings downgrades, and it’s not going to surprise anyone that the strong downward revisions have been seen in the energy (-15%) and material (-10%) sectors. Only telcos (+10%) have avoided the negativity.
There is always healthy scepticism about why the bar is set so low. The fact is we’ve seen consensus earnings beating the analyst’s forecasts consecutively since Q4 2008 (26 quarters in total). It’s not hard to imagine a 27th. Keep in mind that the ratio of negative-to-positive guidance confessions stand at 2.75x, which is very much in-line with the decade average, but an improved picture from 5.35x seen in Q1 and 3.33X in Q2. This should be seen as a small net positive, although this lack of guidance could well be due to limited earnings visibility.
The macro back drop
One of the key issues we saw in Q3 was the huge pick-up in implied volatility, with the US volatility index (‘VIX’) trading between 53% and 10%, ultimately showing one of the largest range expansions since the VIX was created. Corporates also had to deal with the following variables in Q3 (using average prices):
- WTI fell 52% year-on-year
- The US dollar index (DXY) rallied 17% year-on-year. This issue will likely play into many outlook statements from companies with a global footprint
- The S&P 500 in general fell 7% in Q3 – the worst performance since Q3 2011
So what will CEO’s say about how these issues affected their business? It’s well worth listening to how CEO’s are seeing trade in China and emerging markets more broadly. This is absolutely the case for names like Caterpillar, Apple, Coach and GE – Yum! Brands are a case in point, having already pre-announced a poor earnings picture with limited visibility. It’s hard to see many corporates being outright bullish on the macro environment.