Q3 Projected to Be Lower than Q2

As earnings season begins to heat up, Wall Street thinks that earnings for the S&P 500 will be lower in the third quarter than they were in the second.

For the record, the S&P 500 earned $24.86 in the second quarter which was an all-time record. Wall Street currently expects Q2 earnings to come in at $24.29 which is a drop of 2.29%.

Don’t be too alarmed — this is still a projected increase of 12.66% from one year ago. Wall Street expects earnings growth to accelerate to close to 17% in the fourth quarter, which seems too optimistic to me. The Street also expects earnings growth of 13.18% in 2012, which is again probably too high.

Sales for the S&P 500 are projected to fall sequentially from $258.76 to $263.31. That’s a drop of 1.73%. Since earnings are projected to fall more than sales, that means operating margins are expected to fall slightly — from 9.44% to 0.39%.

The operating margin market of 9.44% in Q2 was the highest since the 9.60% mark reached in the third quarter of 2006. The lesson is that earnings can’t continue to rise thanks to higher margins — sales need to rise as well.

To give you an idea of how powerful the margin story has been, sales growth from Q2 of 2009 to Q2 of 2011 was almost 18%. Earnings growth, however, was 80%. Margins increased from 6.19% to 9.44%.

Posted by on October 13th, 2011 at 10:10 am


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