With 86% of the S&P 500’s market cap reported, 2Q earnings growth has been negative, with profits down 1.6% excluding Financials. This marks the first quarter of year-on-year profit declines since 2009. Moreover, while EPS surprises have been positive, they have been the weakest of the current recovery cycle, and revenue surprises have been negative.  Recently, the majority of economists have lowered their U.S. GDP expectations for 3Q and 4Q. With the majority revising their estimates to 1.5- 2.0% real GDP, this are historically represents stall speed for earnings, consistent with low single-digit growth rates. Should GDP come in consistent with forecasts, equities will remain flat through the end of the year, apart from any positive one off macro shocks, e.g. Bernanke or the ECB. Following 2Q announcements, companies have issued weak guidance, resulting in downward revisions to analyst estimates. At present, consensus expectations are for earnings to decline by 1.5% in 3Q. This implies further deterioration in margins. Although margins might hold up better than expected, incorporating the negative economic outlook suggests top-line expectations may be too high.

S&P 500 Earnings Growth YoY

S&P 500 Revenue Growth YoY (Revenue growth has deteriorated in each of the past 4 quarters)

S&P 500 Earnings Surprise (2Q12 earnings beats are the weakest of the current recovery cycle)

S&P 500 Revenue Surprise (Revenues have negatively surprised in the current quarter)