Dwindling top lines the bottom line for spooked investors

Companies hitting earnings estimates but not sales estimates; markets taking a header

By Jeff Benjamin

Oct 24, 2012 @ 3:39 pm (Updated 3:44 pm) EST

stock market, stocks, earnings, Wall Street, Facebook
Bloomberg News

A rally today by Facebook Inc. Ticker:(FB) shares following the company's strong earnings report stands out as shining moment in an otherwise disappointing third-quarter earnings season.

Financial advisers and market watchers already are bracing for a choppy next few months, which will include a presidential election in two weeks and the looming economic year-end threat of the fiscal cliff.

The S&P 500, which was down less than 1% in midday trading, has lost 3.3% after declines in four consecutive trading days.

Facebook stock, meanwhile, gained 10% in after-hours trading yesterday after beating analysts' estimates for both revenue and earnings.

While there is some evidence of potential economic recovery in Europe and Asia, the U.S. markets are seemingly fixated on the domestic data.

“The market volatility we're seeing has been driven primarily by corporate earnings, which have been disappointing pretty much across the board,” said Byron Green, chief investment officer of Green Investment Management Inc.

According to FactSet Research Systems Inc., of the companies that had reported third-quarter earnings by Friday, 70% reported earnings above the mean estimate. but only 42% reported sales above the mean estimate, which is the lowest level since 2009.

When Wall Street sees this kind of pattern of shrinking top-line growth, it instinctively draws conclusions about a slowdown in future earnings. “We need to see top-line growth, and we're not seeing it, because the economy is at a standstill,” said Christian Hviid, founder and managing principal of Point Guard Capital LLC.

The fundamental reality is compounded by technical data that show the market's inability to break through a mid-September high-water mark.

After touching the 1,474 mark Sept. 14, the S&P 500 gradually retreated by 3% to 1,430 on Sept. 26. Since then, the market has rallied and pulled back twice, each time reaching a lower high and deeper low.

The index's latest drop also has pushed the benchmark below the crucial 50-day moving average, raising more concerns on the technical front, according to Mr. Hviid.

“The market always looks forward, and so far, the guidance from companies has been more negative than positive, which adds fuel to the fire,” he said. “Now it looks like the technicals have broken down and the fundamentals have fallen.”