Don't get too excited by earnings beats – the bar is set very low

  • The consensus estimate for fourth quarter S&P 500 growth has fallen to 11.9 percent from 17.8 percent in September.
  • Preliminary earnings results are already showing earnings beats, RBC Capital Markets strategist Lori Calvasina said.
  • But those better-than-expected results represent companies stepping over a very low bar.
Source: Madison Mountaineering | CNBC

The season of fourth-quarter earnings reports has begun and already companies are beating expectations. But that's not necessarily good news for stocks, as those expectations are very low.

Wall Street slashed profit estimates over the last three months as the S&P 500 index lost 6.8 percent. The consensus estimate for fourth quarter S&P 500 growth has fallen to 11.9 percent from 17.8 percent in September, data from FactSet shows.

Preliminary earnings results are already showing earnings beats, RBC Capital Markets strategist Lori Calvasina said in a note to investors on Tuesday. But those better-than-expected results represent companies stepping over a very low bar.

"The tone around demand and the underlying backdrop has rattled US equity investors," Calvasina said.

Apple confirmed what many feared when it announced lowered revenue guidance for the upcoming quarter. Even if Apple were to beat expectations, the damage to the stock was done earlier this month following the lowered guidance.

Morgan Stanley strategist Michael Wilson said he expects more "Apple-like price reactions to guidance cuts" when companies report. "We would expect negative guidance revisions to be a persistent theme during 4Q earnings season," Wilson said.

Even with the diminished expectations, Bank of America Merrill Lynch's Savita Subramanian said instances of companies beating expectations will be smaller and fewer. Her analysis shows that even the slashed estimates may not be enough, as Subramanian said "more estimate cuts are likely" for fourth quarter profits.