Earnings Season Flashing ‘Warning Signals’ to Wells Fargo

U.S. companies are beating analysts’ earnings projections by the smallest margin since 2008 and most forecasts have trailed estimates in what investors should consider “warning signals,” according to Wells Fargo & Co.

Of the Standard & Poor’s 500 Index companies whose earnings topped estimates so far in the reporting season, just 53 percent surprised by more than 1 percent, Wells Fargo strategist Gina Martin Adams wrote in a note to clients yesterday. The so-called beat rate this season is poised to be the lowest since 2008 and 12 percentage points below the 10-year average, according to the note. About 81 percent of forecasts for next quarter trailed analyst estimates, the note said.

“When fewer companies are beating by 1 percent than the long-term average, typically we’ve actually been in a recession or headed into one,” Martin Adams, New York-based equities strategist at Wells Fargo, said in a telephone interview. “It does flash warning signals.”

About 74 percent of the 354 companies in the S&P 500 that have released quarterly results so far this earnings season have exceeded profit projections, data compiled by Bloomberg show. They have beaten forecasts by 5.2 percent on average. Analysts’ estimates for S&P 500 earnings growth in 2013 declined to 6.7 percent from 8.8 percent at the end of last year, according to data compiled by Bloomberg. Adams said she is expecting full-year profit to increase by 3 percent.

The S&P 500 has rallied 6.5 percent so far this year to 1,519.45 as of 3:20 p.m. in New York, less than 3 percent below its record reached in October 2007. Adams forecasts the benchmark gauge will end the year at 1,390, the lowest estimate among 15 strategists surveyed by Bloomberg.

‘Truly Weak’

“It’s been fascinating to me how truly weak our indications of earnings season are, but how truly strong the interpretation of earnings season has been,” Adams said in the interview. The rally has left the S&P 500 trading at 15 times reported earnings, the most expensive valuation since July 2011. The multiple has risen from a low of 13 in 2012, while remaining below its six-decade average of 16.4.

Economic growth in the U.S. is forecast to be 1.5 percent this quarter and 2 percent in 2013, based on the median estimate from economists surveyed by Bloomberg.