Last week marked the end of the 2Q reporting period of Brazilian publicly traded companies. Needless to say the results were far below projected. Now, expect a wave of downward forecast revisions for 2012 and 2013 to adjust for the declining profits.

A study by CESP foundation including 90 companies was discussed by CESP’s director Mr. Jorge Simino, where he exposes some of the weakness in these results. For instance, in the second quarter of this year, the overall earnings of the largest 90 companies fell a whopping 53% when compared to 2Q11. Obviously, commodity giants Petrobras and Vale account for the majority of these earnings, but even without the duo it was still an awful lot: 30% drop in earnings year over year.

To have an idea of the magnitude of this “bloodbath,” in the first quarter of 2009, which was the peak of one of the world’s worst crisis in history, earnings of Brazilian companies fell by just 16% over the first quarter 2008. This might explain why the foreign investor’s love affair with Bovespa might be over.

What will happen in the coming quarters?

According to Mr. Simino, nothing really hints to a rosy scenario. The sustainability of the current Bovespa rally can only be justified if profits grow by 15%-20% in 2013, which would translate into a P/E of 11x.

How likely will businesses grow earnings by that magnitude?

Don’t bet the house.

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