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business newsEarnings Pummel Expectations, But Are They Real?
By
Josh Lipton May 03, 2010 2:40 pm
Strategists go behind the headlines of this better-than-expected earnings season.
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Through April 30, 337 companies in the S&P 500 Index have reported earnings for the first quarter. Of these 337 companies, 78% reported earnings above analyst expectations.
And they’re besting them strongly: by 16%, which is well above the 2% long-term average surprise factor.
If the final percentage of companies surpassing estimates in the first quarter is 78%, according to the number crunchers at Thomson Reuters, it will mark the second-highest percentage of companies beating estimates for a quarter since Thomson Reuters began tracking the data in 1994.
(The highest percentage of companies reporting earnings above expectations for a quarter is 79%, which was recorded in the third quarter of 2009.)
The bounce-back in earnings also now appears broader based: The Financials sector has the highest growth rate (349%) of any sector. Excluding those banks, earnings growth is expected to clock in at 36% in the first quarter, up from 18% in the fourth quarter.
“Clearly, the earnings strength, year-over-year, is more broad-based this quarter,” John Butters, director of US earnings research for Thomson Reuters, tells Minyanville. “Almost all the growth in the fourth quarter was coming from the Financials sector. Now, Financials are still a large contributor, but we're seeing strength in a number of other sectors as well.”
The top line is also showing some healing here: in aggregate, revenues are forecasted to rise 11% versus 8% in the fourth quarter.
It’s also worth noting that the ratio of negative-to-positive pre-announcements for the S&P 500 for the first quarter is 0:8, below the long-term average of 2:1.
More simply: We’re seeing more positive pre-announcements and fewer negative pre-announcements from companies versus what’s historically the norm.
What’s driving the better-than-expected earnings from our country’s biggest companies?
As we detailed in our recent article, What to Expect From First Quarter Earnings, strategists chalk it up to a myriad of reasons: an improving economy, still-low interest rates, a decline in the value of the US dollar, a less frightened consumer, an improvement in revenue growth, and, most importantly, much easier comparisons.
However, we’d be remiss if we didn’t also include a more skeptical take on the earnings season. For that, we knew we could count on Gluskin Sheff’s David Rosenberg to call the cops on this party. The strategist wrote last week that there's less quality to these earnings than meets the eye, in his opinion. Rosenberg argues that earnings surprises are still primarily being driven by cost surprises. The “surprise factor” (the gap between actual and what was estimated going into the release) for total earnings is 21%. But that’s skewed, Rosie writes, by the 74% surprise factor in the Financials.
The revenue surprise factor is running at a modest 3% and ex-Financials, it would be flat, he says. “In other words, outside of Financials, revenues are just meeting analyst expectations. In a nutshell, the impressive earnings surprises, thus far, are being driven by Financials cost surprises (including write offs).”
This week marks the final “peak week” of the first-quarter earnings season. By the end of the week, says Thomson Reuters, about 86% of the companies in the S&P 500 will have released results for the quarter.
Investors will hear from the front offices of Archer Daniel Midland (ADM), American Tower (AMT), Baker Hughes (BHI), Mastercard (MA), Pfizer (PFE), and Molson Coors Brewing (TAP), to name just a few companies.
Investors have taken notice of the analyst-besting news: Year-to-date, the S&P 500 is now up 7.2% and the index’s advance in April was stronger than its historical return since 1928, notes S&P’s Sam Stovall.
Indeed, seven of the 10 sectors rose during April, lead by Consumer Discretionary, Energy, and Industrials. What’s more, 106 of the 133 sub-industries rose in price.
Looking ahead, though, some strategists urge caution, pointing to contrarian indicators like bullish investor sentiment and, of course, the strong seasonal effect in stock returns based on the “sell in May and go away” rule.
Stovall reports that, since 1945, the S&P 500 posted an average price gain of 6.7% during the November-April period versus a rise of only 1.4% from May-October. (Hat tip: Yardeni Research.)
Another cause for potential concern is highlighted for us by Vinny Catalano, president and global investment strategist with Blue Marble Research: Small investors haven’t been a key driver in this bull market. Instead, it's been those well-heeled hedge funds moving the market higher from last year all the way to the present. So, Catalano says, watch out for any financial reform out of Washington that puts those hedgies in the crosshairs. “Anything that impacts them is something you should be very concerned about,” he says.
No positions in stocks mentioned.
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