Peak Financial Engineering? Trends Spiral South
Our corporate heroes hit a snag.
We have long grinned painfully at the ways in which Corporate America and analysts collude to present the quarterly earnings charade in the rosiest light possible. But now, it seems they have reached the end of their magic tricks, and reality is showing through in an increasingly terrible trend.
Analysts concoct sky-high earnings-per-share expectations for quarters in the distant future to obtain “forward-looking,” pro-forma, adjusted, ex-bad-items fictional P/E ratios that they then bandy about to raise “price targets” and justify ludicrous stock valuations.
As the actual quarter draws nearer, these earnings expectations get whittled down to where very little earnings growth is left, if any. This way, corporations have a good chance of beating them, and thus propping up their stocks via an “upside earnings surprise.” If they get it right, it works like a charm.
Over the past four years, 72% of the S&P 500 companies have managed to report higher earnings per share than the analysts’ mean estimates at the time, according toFactSet. And so earnings growth has been on average 2.9 percentage points higher than the mean estimate at the beginning of the quarter, “due to the large number of upside earnings surprises,” as FactSet puts it.
Now the bad news. Currently the S&P 500 companies are projected to report a year-over-year decline in earnings of 4.4% for the second quarter, on a revenue decline of 4.2%. Of the companies in the index, 24 have already reported, which nudged up the estimates at the beginning of Q2, when the earnings decline was pegged at 4.5%.
So everything is estimated to head south. Companies are blaming the dollar, in addition to the weather and a slew of other things. Instead of losing value as it had been for years, the dollar has regained some inconvenient oomph. And inflation has been too low for our corporate heroes.
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