S&P 500 Up 6% In Q3 ’12. Financials Revival?

While most market watchers were expecting Q3 ’12 to be a repeat of Q3 ’10 and Q3 ’11, in fact it surprised everybody, with the S&P 500 returning 6% this quarter, after Q1 ’12′s 12% return.

The problem the Street seems to be having is keeping up with the S&P 500, as this year’s 16% total return for the key benchmark has caught a lot of investors off guard and defensively positioned.

So what’s next ? This coming week, October 1 – October 5th, there are not a whole lot of large-cap S&P 500 companies reporting, thus we wait for Q3 ’12 earnings to start the week after next, with Alcoa (AA) and General Electric (GE) likely to lead off the quarter.

For Qq2 ’12, core S&P 500 operating earnings grew about 1.5% – 2% on +1% revenue growth, and for the Q3 ’12, consensus is expecting -1% to -2% decline in operating eps for the S&P 500 on -1% revenue growth. The third quarter is expected to be the lowest year-over-year earnings growth for the S&P 500 since mid 2009, or the recession’s bottom.

The “forward 4-quarter estimate” for the S&P 500 as of Friday was $107.89, just below the record estimate of $111 on July 14th, but still above, the recent low of $105 in late March. Despite the hand-wringing and consternation over S&P 500 earnings, the forward estimate has remained remarkably stable the last 12 months.

The point being that expectations are very low for Q3 ’12 results, even though the market continues to trade with an overall positive tone.

Here is Q3 ’12 and Q4 ’12 expected earnings growth for each sector of the S&P 500 both as of Friday, September 28th, and as of July 1 (July is in first column):

3rd quarter, 2012:

Cons discr: 13.2% and 7.5%
Cons stapl: 5.2% and 2.0%
Energy: -14% and -20%
Financials: 4.2% and 5.5%
Hlth Care: 0.2% and -2.7%
Industrials: 10.1% and 3.7%
Materials: -3.3% and -21.5%
Technology: 13.1% and 2.1%
Telecom: -8.7% and -12.1%
Utilities: -7.1% and -7.6%
S&P 500 3.1% and -2.1%

Perhaps ironically, Financials are the only sector to improve in terms of y/y eps growth estimates from July 1 through Sept 28th. The XLF was up 6.5% in the 3rd quarter alone (excluding the dividend) while JP Morgan rose 13% in the 3rd quarter, also excluding the dividend. Energy and materials continue to see downward revisions to q3 ’12 estimates.

4th quarter, 2012:

* Cons discr: 20.6% and 16.8%
* Cons stpl: 8.6% and 7.2%
* Energy: 5.8% and -1.5%
* Financials: 26.6% and 28.4%
*Hlth Care: 5.2% and 2.6%
* Industrials: 8.5% and 3.5%
* Materials: 38.8% and 23%
* Technology: 15.3% 9.6%
* Telecom: 11.7% and 3.6%
* Utilities: 1.7% and -4.4%
* S&P 500 9.8% and 13.9%

Once again, Financials are the only sector to show an improvement in growth estimates from July 1 to September 28th, in Q4, similar to Q3. Is there a revival occurring in Financials? Is this the reason the stock market maintains a persistent bid despite what has been pretty weak economic and political news? The Financial sector has long been considered the market’s “General” meaning that Financials often lead us higher. Are we finally seeing a turn in the prospects for this sector of the stock market? Inquiring minds want to know.

Interesting that Barron’s cover story this week was on Goldman Sachs (GS), a key financial stock for both the sector and the market. We have Goldman’s tangible book value (TBV) at $130 per share, so GS is still trading at a discount to tangible book. Haven’t read the article yet.

We’ll be out tomorrow with more sector, asset class and individual stock commentary. Enjoy your weekend.