The Difficult Part Is Still Ahead: Analysts Just Sharply Scaled-Back Forecasts For Tech And Financial Results For Q4 2012, Debt Ceiling Fight Will Add Fuel To The Fire, And Many Wall Street Experts Expect The Bond Bubble To Burst Very Soon
Tech, bank forecasts slashed in run-up to earnings
Sharply scaled-back forecasts for tech and financial results have flattened the outlook for the fourth-quarter earnings season, the next likely catalyst for stocks after a policy-clogged few months.
Analysts have cut their forecasts by a little more than 10% for tech and financials over the three-month period that ended in December, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The only larger reduction by analysts was in the materials sector, with estimates off by 14.4% from early October. Tech and financial companies, however, are more heavily weighted on the S&P 500 Index (SNC:SPX) than resource stocks.
FactSet also noted that tech, financials, and materials were the three largest sectors leading declines in expected earnings growth for the fourth quarter. Analysts polled by FactSet expect 2.4% earnings growth for the S&P 500, down from 9.2% forecast growth at the end of September.
Tech companies also have put out the highest percentage of negative outlooks for the fourth quarter, according to John Butters, senior earnings analyst at FactSet.
Out of 32 tech companies, 29, or 91%, have issued an earnings outlook that falls below the Wall Street consensus, compared with a five-year tech company average of 56%.
That’s compared with the 71% negative rate from 110 companies issuing outlooks in the S&P 500, above the five-year average of 61%.
Two other S&P 500 companies are scheduled to report earnings next week: Apollo Group Inc. (NASDAQ:APOL) on Tuesday and Constellation Brands Inc. (NYSE:STZ) on Wednesday.
The Difficult Part Is Still Ahead
The explosive market rally following the fiscal cliff agreement was based more on what didn’t happen than what did. What didn’t happen was the implementation of automatic tax increases and spending cuts that would have shaved about 5% off GDP and cause a recession. What did happen was an agreement that would still reduce GDP by about 1.5%, an amount that still looms as significant in light of an economy that is only slogging along at a growth rate of about 2%. Even more important is the potential mess that lies ahead. The Treasury Department’s extraordinary measures to extend the debt ceiling runs out at the end of February or the beginning of March. The sequester requiring automatic across-the-board spending cuts of $110 billion for 2013 goes into effect on March 1st. The federal government’s spending authority for the current budget expires on March 27th.
The combination of the debt limit, the sequester and the government’s spending authority, all expiring within a short period promises to make the turmoil over the August 2011 debt limit fight look like a day at the beach in comparison—–and that fight led to a U.S. credit downgrade and a near default on paying federal obligations on time. Already, the Republican congressional leadership has declared its intention of using the debt limit to press for significant spending cuts, even at the risk of another credit downgrade and the shutting down of the federal government. Senator Pat Toomey of Pennsylvania said “We Republicans need to be willing to tolerate a temporary partial government shutdown.”
Are there other financial options for the US government other than Congress approving a higher debt ceiling?
Analyst Jaret Seiberg from the Washington Research Group has looked at two that are being discussed — and he’s dismissive of both:
The President could assert that that 14th amendment negates the requirement for Congress to raise the debt ceiling.
Or Treasury could mint a $1 trillion platinum coin and deposit it at the Federal Reserve.
After three decades of declines, interest rates are near rock bottom, and many Wall Street experts think the bond bubble may be about to burst.
In fact, nearly 40% of the 32 investment strategists and money managers surveyed by CNNMoney think that interest rates will begin to rise in 2013, and another 30% say the shift will begin in 2014.
The 10-year Treasury yield has fallen from nearly 20% in the early 1980s to less than 2%. Click the chart for more bond market data.