The Magical Q4 Earnings Hockey Stick

Lying about future earnings prospects is a national American tradition and amazingly the US government has done little to curb this manipulative practice. Stock market analysts routinely misinform investors by inflating future earnings prospects. As I mentioned in a Seeking Alpha article 5 years ago, the chance of forward projected earnings being higher than actual reported earnings is 80% and the average miss is around -18%. In other words, final reported GAAP earnings routinely are -20% below what was originally advertised to investors. You can say that analyst routinely overstate earnings by about 20%. The S&P 500 earnings per share numbers I use are the numbers that Standard & Poors puts out to investors every week in an excel spreadsheet on their S&P 500 website and I track the changes in the numbers from this spreadsheet.


When the S&P 500 has a year when earnings are about to go into a recession (start declining), analysts magically start to pack further out quarters (where more speculation is allowed) with imaginary earnings for which there is no basis in reality. We see this analyst behavior in 2019 and we observed it in 2015 as well when the S&p 500 had its last earnings recession. Look at the GAAP EPS quarter over quarter change compared to last year’s quarter in the chart above. In Q4 of 2019, we magically are expected to see 43.6% earnings growth. So we have growth projected to be 10% for 3 quarters and then magically – a 43% quarter. Q4 is the quarter when corporations confess to their business failures during the year and take their biggest write-offs (for store closures, failed business expansions, etc).

How is it even possible to project 43% growth in Q4?

In 2016 Q4 we saw a big jump in earnings of +29% because oil prices recovered from the lowest inflation adjusted prices in decades and the US economy recovered from the 2015 slowdown. In 2017 on the back of a stronger economy after election uncertainty was removed and a weakening US dollar, we saw +11% Q4 EPS growth. In 2018, on the back of the Trump tax cuts, a strong economy and even stronger oil prices we saw another +7% growth. Notice how the Q4 growth in earnings has declined despite the EPS number getting bigger and bigger. That is because the EPS base becomes larger and thus it becomes ever hard to post accelerating earnings growth. It is simply the law of large numbers.



So now this year – without tax reform to artificially boost earnings, without 100% increase in oil prices, on the back of the biggest Q4 EPS ever reported, market analysts are expecting 44% growth in earnings? Really?!?

Let’s see if there is even historical precedent for this. In the table below, I look at Q4 GAAP EPS for the SPX for all years since 1988. That is about 30 years of data. In 30 years, we have had only 4 years when Q4 year over year earnings growth has exceeded 40%. In 2009, 2003, 1999 and 1994. In 2003 and 2009, the US economy recovered from a recession so big jumps in earnings like this are to be expected. But the US economy is not in a recession today. In fact GDP growth in 2018 was the highest since 2005. So we can’t use recession recovery years to compare to today.

In 1999, the SPX had negative EPS growth in 1998 and 1997 and the strong EPS number in 1999 simply represented an earnings snapback in what was an otherwise a strong economy. We didn’t have negative EPS in 2018 and 2017, so 1999 is not a proper comparison.

So really the only comparable to 40%+ projected EPS growth is 1994 which was the 3rd year of an economic expansion, not the 10th year.

Color me skeptical. When the final counting is made, 2019 Q4 will be nowhere near what is projected today. For Q4 of 2018, my pessimistic projection was for $30 GAAP EPS and SPX corporations couldn’t even deliver that coming in below at $28.97. I made a $30 projection when the prevailing analyst estimate was $37! I was a big growling EPS bear and corporations came even under me. Wages are rising faster than analysts want to admit and recession in Europe and China is hurting sales more than analyst want to admit.

To put it simply: analysts are lying again and in an outrageous fashion. There is room for speculation but what we have here is not speculation. It is lying. And the problem is that it appears that some investors are listening with the stock market off to the 6th best return in 30 years. My question is, when are going to curb this analyst behavior? How can analysts be allowed to make overly optimistic projections that have less than 10% historical chance of happening?


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