While Alcoa�s (AA) negative surprise last Tuesday got the �official beginning� of the third-quarter earnings season on a sour note, most of the news has been positive. To date, 42 companies out of the S&P 500 have reported and the results have been overwhelmingly positive. Positive EPS surprises have outnumbered negatives by 6:1 and the median surprise is an impressive 3.7%. With the Dow hitting new highs and energy prices continuing to trend downward, the market seems to be shrugging off fears of a near-term recession. As reports ramp up however, it will be much easier to see how corporate earnings performance matches up with the market�s renewed bullishness.
So far, the sector�s seeing the largest number of companies reporting have been Consumer Staples and Consumer Discretionary. Firms with double digit upside surprises include Circuit City (CC), Mccormick (MKC), and Supervalu (SVU). No firms in either sector reported a negative surprise. The Tech sector has also seen excellent EPS performance thus far with a median surprise of nearly 9.4%. The surprise ratio stands at 5:1. Adobe and Tektronix lead the charge, with 13.6% and 14.3% respective EPS surprises.
The yearly trends show no sign of recession.
On a full-year basis, earnings growth for the S&P 500 is expected to remain solid. Double-digit gains are expected on both a median firm and total net income basis. On a median basis, growth for the current and next fiscal year is expected to be 13.1% and 12.9%, respectively. This growth rate has stayed relatively stable over the last several weeks. On a total earnings basis, the growth rates are more skewed towards this year, at 15.1% versus 10.4% next year. While the total growth rate is certainly predicted to slow, by no means is a 10.4% year-over-year growth rate tantamount to predicting a near-term recession. On the other hand, if the recent trend toward more downward revisions than upward revisions continues, those expected growth rates will deteriorate.
The analyst who writes this report has no bone in the bullish or bearish fight. Now given the same data bears are out twisting it to suit their hypothesis. That is why they are losing credibility and followers. If you want to understand markets study the earning trends.