by Greg Harrison.
As the beginning of the second-quarter earnings season approaches, the negative guidance sentiment is weighing on analyst estimates. So far, S&P 500 companies have issued 97 negative earnings preannouncements and only 15 positive ones, for a negative to positive ratio of 6.5. The guidance has contributed to the downward slide in second quarter growth estimates, with EPS currently estimated to grow 3.0%, down from the 8.4% estimate at the beginning of the year.
Analysts have an even bleaker outlook for the top line. After a first quarter when S&P 500 companies reported an aggregate revenue growth rate of 0.0%, the consensus currently calls for 1.8% growth in the second quarter. With revenue growth holding back earnings for the past several quarters, we did an evaluation of company management teams’ outlooks for their revenues. Over the time period evaluated, Q1 2008–present, revenue preannouncements were more balanced than were EPS preannouncements. On average, there were 1.7 negative revenue preannouncements for each positive one. This compares with an N/P ratio of 2.4 for EPS over the same period.
As seen above in Exhibit 1, the recent trend in revenue guidance has been bearish. In Q3 2012, the revenue N/P ratio hit its highest point since the financial crisis, at 3.6. That was also the first quarter where revenue declined, with a growth rate of -0.8%. Since then, company management teams have continued to provide lower revenue estimates than have analysts; these estimates have accompanied weak revenue growth, with 3.6% in Q4 2012 and 0.0% in Q1 2013.
Looking forward to second-quarter revenue results, management teams have been even more conservative, with 3.1 negative preannouncements for each positive one. With the exception of last year’s third quarter, this is the most negative N/P ratio of the economic recovery. The second-quarter revenue growth estimate has fallen to 1.8% as negative guidance has come out, down from 3.9% at the start of January.
Within the sectors, healthcare companies have given the most negative revenue guidance, with eight negative preannouncements and only one positive. Overall, companies tend to offer revenue guidance less often than earnings guidance. Information technology is the exception, however, with 38 negative preannouncements and 13 positive ones, for an N/P ratio of 2.9.