The third quarter earnings season is beginning, first with a trickle, but it will soon turn into a flood. For the 25 companies reported thus far, 22 have reported above expectations. Negative revisions for both this year and next however, put a shade of grey on these preliminary results. Our revisions ratio, which is calculated by dividing positive analysts’ revisions by negatives, is below one. This means that of the 1,250 fiscal 2006 analysts’ revisions compiled over the last four weeks, 657 were negative. This gives an 2006 EPS revisions ratio of 0.90. While the rise in the revisions ratio is good news, eight of the ten sectors had negative revisions ratios for the year, with only the financials showing significant strength. The ratio for fiscal 2007 is even worse, at 0.80. On the bright side, the 2006 revisions ratio has been climbing for the past two weeks, after having bottomed out at 0.71. The unfavorable 2007 ratio however, has held solid at its current value. If both ratios remain at their current levels as third quarter reporting picks up, it could be the canary in the coal mine. The high expected earnings growth rates indicate that the economy will remain healthy, despite disturbing indicators such as an inverted yield curve and a plunging housing market. So far the negative revisions ratios have yet to put a meaningful dent in the earnings expectations. This is mostly due to the low absolute numbers of revisions during this slow season.
The S&P 500 is set to post double-digit median growth for both this year and next. This is true regardless if measured on a total net income basis or a median firm basis. Current downward revisions would have to lower EPS values substantially and across multiple industries before our overall earnings outlook turns bearish.
The latest earning trends do not show major worries on horizon so far. Like many other things in life, learning's are cumulative. I have been religiously following earnings for many seasons and the more you do it, more you understand about it. The Zacks analysis is always a good place to figure out long term trends in earnings. You will get many clues to impending sector or market moves once you understand what this earning game is all about. Till then for most it sounds like Greek.