The last three earnings seasons have all resulted in lack luster performance in the post earnings season. The disturbing part of the matter is that in the last three earnings seasons there was optimism behind the market and earnings were actually coming in ahead of estimates for the most part. Why the estimates were being beat in the last few quarters is open to interpretation.
Reality
When expectations are low and government stimulus and government programs are in full swing it is not so difficult to beat estimates. The problem is that after each of the last three earnings seasons we have seen larger and larger drops. After Q3 2009 we saw a 5.5% drop, after Q4 2009 a 8% drop and after Q1 2010 a 15% drop. Now that the stimulus is pulled back, cash for clunkers is gone, and home buyer credits are gone we are seeing a drop in consumer confidence and other forms of weakness. So, the answer to the question of how will we fare after the Q2 2010 earnings season does not look good if history is the guide.
In addition, to the post earnings season performance take a look at the lower lows since April 2010. Leading up to April 2010 we saw higher highs and higher lows. Now we are seeing lower highs and lower lows. The trend has reversed for now.
Below is a chart of the S&P 500 and the last three earnings seasons. Click on the image below to see a larger version of the chart.
Chart courtesy of StockCharts.com
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