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Look Out, S&P Companies Warn About Q2 Earnings

Monday, 3 Jun 2013 | 2:09 PM ET
Adam Jeffery | CNBC

If earnings guidance is any guide, the S&P could be in trouble. The second quarter earnings picture that we can piece together from S&P 500 guidance is a negative one indeed.

Over the past five years, an average of 62 percent of S&P companies that have issued earnings-per-share guidance have given projections below the mean EPS estimate. But research company FactSet reports that for the second quarter, 86 of the 106 S&P companies have projected below the mean, meaning that 81 percent of the guidance has been negative. In the materials sector, a whopping 88 percent of guiding companies have issued negative guidance.

"There's certainly a trend where companies tend to be more conservative when giving guidance, so that can turn around and beat that number," said John Butters, senior earnings analyst at FactSet. But on the other hand, "if we finished here, it would be the quarter with the highest percentage of negative pre-announcements since we began tracking the data in 2006." Butters adding that the percentage of negative guidance is likely to change somewhat in the coming days.

Analysts, for their part, have slashed their earnings growth expectations over the course of the second quarter. Whereas they have previously expected earnings growth of 4.4 percent for the S&P 500, analysts now expect growth of just 1.3 percent, FactSet reports.

In the battered materials sector, analysts used to expect earnings growth of 9.4 percent. But since the second quarter began, analysts have cut earnings growth expectations so that they now anticipate materials companies to report a 3 percent decline in earnings.

That said, it's not all bad news. For the financial sector, analysts have actually increased their earnings expectations, so that 17.1 percent growth is now foreseen. This comes after a first quarter in which 75 percent of S&P 500 financials have reported earnings above estimates.

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Indeed, a skew in the types of companies that report guidance could be partially to blame for the high percentage of bearish estimates.

"There's somewhat of a sector bias here," Butters told CNBC.com. The sectors where you get the most guidance are technology and consumer discretionary—after that it's industrials, material, and health care. On the other hand, he added, "not a lot of financial companies give quarterly guidance, and none of the big names do, so you're not getting that counterweight. If a lot of companies in the financial sector gave guidance, it might be more positive."

But for Dan Nathan of RiskReversal.com, it is clear that earnings have not provided a reason to buy into the market.

"The earnings picture is obviously weak," Nathan said. "What's really happening is, enthusiasm about increased dividends and share buybacks are masking some pretty poor earnings growth."

If earnings do come back to the fore, bulls could have a problem on their hands—particularly if they are looking for the materials sector to take leadership of the market.

— By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex

Follow "Options Action" on Twitter: @CNBCOptions

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