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Q3 Earnings Were Ugly, and Even Uglier Q4 Earnings Start Soon

Well, we are at the tail end of the earnings cycle, so it’s time to weigh on what it all means.

In short, corporate profits are ugly — and getting uglier.

Here’s a comprehensive look at Q3 earnings and what it means about the state of the stock market and corporate balance sheets, both for the previous quarter and looking ahead to what the current quarter’s numbers will inevitably show:

Operating Earnings Evaporating: On a nominal EPS basis, earnings have dropped a substantial amount in the past 18 months. Take this chart from Standard & Poor’s, showing how the operating EPS figures for Q4 2012 continue their steady march downward.

Earnings Growth Is Negative: As expected, the growth rate is negative, signaling the end of 11 straight quarters of profit growth. FactSet (NYSE:FDS) reports the decline was 0.9%. And if you really want to be bearish, consider data from Morgan Stanley‘s (NYSE:MS) Adam Parker that shows the lion’s share of 2012 earnings growth — 88%, in fact — is largely concentrated among just 10 companies that include a resurgent Bank of America (NYSE:BAC) and AIG (NYSE:AIG) thanks to weak year-over-year comparisons. Not inspiring.

Some Mammoth Q3 Misses: Remember all the high-profile misses in Q3? Consider that tech giants Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) all missed expectations. I could pepper you with a dozen other big-name misses if you weren’t paying attention — from telecom Sprint (NYSE:S) to pharma stock Bristol-Myers (NYSE:BMY) to restaurant stock Chipotle (NYSE:CMG) to manufacturer Cummins (NYSE:CMI) … but I’m sure your own portfolio gave you plenty of material here. Some might point out that I’m cherry picking here; that the majority of S&P stocks have beaten expectations. True, but considering the last time more than half of S&P 500 stocks missed earnings estimates was 1997, that doesn’t say much.

Don’t Forget About Revenue: FactSet pointed out in late November that “Of the 486 companies that have reported earnings to date for Q3 2012, 70% have reported earnings above the mean estimate, but only 41% have reported sales above the mean estimate.” It’s hard to grow the bottom line when the top line is disappointing.

Guidance Is Overwhelmingly Negative: FactSet also reports that guidance for Q4 earnings is ugly; namely, 75 companies issued negative guidance vs. 28 issuing positive guidance through Nov. 23 data.

Q4 Earnings Expectations Are Low: Sam Ro over at Business Insider noted the slumping Q4 outlooks way back at the end of October. Then in November, Cullen Roche over at Pragmatic Capitalism hosted a great report from Societe Generale that noted less than half of the “experts” expect growth. Then just last week, renowned economist Ed Yardini posted this ugly chart in his blog showing how estimates continue to trend dramatically lower for Q4 earnings — and that analysts have moved the bar quickly lower in anticipation of each of the last few earnings seasons, too.

Maybe Not a “Cheap” Market for Long: All this could be stomached if it were priced in. But there’s a disturbing trend that FactSet points out in this chart, which indicates investors are bidding stocks higher despite slow earnings growth — contradicting many who claim that the market is “cheap.” The current forward P/E of the S&P 500 is 12.4 — indeed below the 10-year average of 14.3, but up significantly from any other point in recent memory since the financial crisis.

Like I said, it all adds up to a rather ugly outlook for Q4 earnings… which will start before you know it. So be prepared.

As InvestorPlace commentator Dan Burrows noted almost a month ago amid the disappointing earnings reports, “It would almost be more shocking if the market didn’t lose some bidders amid such a slowdown.”

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.

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