In last week's edition of "The Corner of Wall & Main," I previewed the September employment report by discussing several other indicators of job creation for the month. All of those indicators pointed to softer job growth compared to July and August. Needless to say, the September report from the Bureau of Labor Statistics had many people — economists, investors and pundits alike — scratching their heads trying to understand exactly how the unemployment rate fell as much as it did — from 8.1 percent nationally to 7.8 percent — given the modest number of non-farm jobs added during the month.
Yes, people have and will quibble over the findings of the household survey and how that translates into what some will call a politically well-timed drop below 8 percent, but many also will key on the 873,000 people who found jobs during September.
That's far higher than other data from businesses that found just 114,000 non-farm jobs added during the month. Digging deeper in the household-survey data, we find that 67 percent of the jobs created were part-time jobs. That, along with weak wage growth and an ever-so-modest bump in hours worked during September, suggests that consumers are still hurting and disposable income remains under pressure.
Consumers account for a significant portion of domestic growth, with some estimates having consumer spending responsible for two-thirds of real gross domestic product (GDP). Already, domestic growth this year has been weaker than last year — up 1.6 percent versus 1.8 percent last year — and a number of economists have ratcheted back growth expectations for 2012.
In late September, Goldman Sachs cut its third-quarter 2012 GDP growth forecast to 1.9 percent. This week the International Monetary Fund shared its view that U.S. growth would be a little more than 2 percent this year and next. Despite those downward revisions, recent data suggest that even those forecasts may be a tad optimistic.
Those revised GDP forecasts come on top of a number of uncertainties — the presidential election, the federal "fiscal cliff," the need to raise the debt ceiling and more — that could affect corporate spending and hiring in the near term.
Given all this, the third-quarter earnings season, which kicked off this week, promises to be very interesting.
For companies in the S&P 500 index, consensus expectations have third-quarter operating earnings at $26.08 per share, according to Thomson Reuters data — up 0.9 percent from the previous quarter and 1.7 percent on a year-over-year basis. That marks the slowest year-on-year profit growth rate since the fourth quarter of 2009.
A number of companies already have warned of third-quarter earnings shortfalls. As of Oct. 5, 80 out of 103 companies tracked by FactSet had issued negative earnings-per-share warnings to investors for third quarter. That's already the highest quarterly percentage — 78 percent — recorded by FactSet for such warnings. Yet those same consensus expectations for the S&P 500 call for a year-over-year increase of 8.5 percent in the current fourth quarter. Again, it sounds aggressive to me and ripe for a downward revision.
Given the weak global economic landscape and the number of uncertainties ahead of us, I believe public company guidance will be even more closely scrutinized this earnings season.
As I write this, the S&P 500 is trading near 14 times the 2012 consensus earnings expectations of $104.59 per share. While that multiple sounds in line with the historical averages for the S&P 500, the underlying 2012-to-2013 earnings-growth expectations are far below the historical average. Consider that in 2011 — a year in which S&P 500 companies' earnings grew 14.7 percent — the index peaked at 14 times earnings in May of that year.
According to FactSet data, the average price-to-earnings ratio for the S&P 500 over the past 10 years is 14.3. That leaves little upside for the S&P 500 at a time when a greater number of companies are likely to post disappointing earnings expectations as the global economy cools and the impact of political gridlock is felt.
Buckle up, my friends, it's on pace to be a bumpy October.
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.
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