What's more, earnings have been particularly disappointing given that sell-side expectations already underwent significant downward revisions months ago. Indeed, the bottom-up estimate for S&P500 third quarter earnings per share dropped quite precipitously from above 28 down to 26.5 in July as management teams lowered their own guidance. Intriguingly, for as downbeat as third quarter results have been, we've yet to see the sell-side revise down estimates for next quarter or 2013 (see chart).
That could be an ominous sign given that the commentary on many a third quarter earnings call has been so cautious, particularly with respect to the fiscal cliff. Qualitatively speaking, we worry that with almost all companies missing top line revenue targets (most notably OC, AVT, NSC, LLY), fourth quarter earnings may end up disappointing sell-side analyst even more than Q3. Moreover, the weakness we’ve seen in the basics/cyclicals as a result of slower growth in China and Europe (DD, DOW, FCX) and the headwind that sequestration looks like it will pose to the defense industry (NOC, GD, LMT) create potentially formidable challenges for those sectors in particular.
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