Tracking earnings can give you a good insight in to market and sector moves.
With over 29% of the S&P 500 reported, the third-quarter earnings season is well underway. The results thus far have been undeniably positive. Median reported EPS growth sits at nearly 11% and positive surprises outnumber negatives by over 5:1. As the Dow continually reaches for new highs, it’s clear that the market has taken a sharp turn from the worry days of mid-summer. As reports ramp up, the lagging corporate performance indicator will come into much clearer focus. These results will help dictate whether or not the market’s newfound enthusiasm has a leg to stand on.
So far, the sectors seeing the largest number of companies reporting have been Financials and Consumer Discretionary. Both sectors have performed well, with positive to negative surprise ratios of 5:1 and 9:1, respectively. Another top performer, the Materials sector is leading the pack in terms of median growth. Of the 20% of Materials companies reported, the median firm has grown EPS at nearly 46%, quarter over quarter. This number is expected to fall off sharply however as new reports come in. Median Q3 growth for all Materials firms listed in the S&P 500 is expected to come in at a still solid 21%.
For the full S&P 500, analysts are expecting 10% median third-quarter growth. Just two weeks ago, the expected growth was 8.6%. If this growth rate proves accurate, it will be slightly lower than the 12.9% seen last quarter. If on the other hand, positive surprises continue at the rate seen so far, the growth rate would be very similar. Going into each of the last two quarters, growth was expected to be much lower than it later proved to be. That pattern seems to be repeating itself.
5 comments:
Did you see this take on things? i am not sure i would classify it as "spin" - it seems to be just more of a "quantitative observation":
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Now, there is another earnings issue worth looking at: Expectation-Management:
"Stephen Biggar, director of American equity research at Standard & Poor's, questions the reliability of those estimates. In the weeks before an earnings announcement, Mr. Biggar said, companies often talk down their prospects so that analysts reduce estimates, making the actual numbers sound better. He prefers to compare reported earnings with estimates made before the expectation-management exercise begins. Using estimates in place on Sept. 18, he concludes that companies are not doing as well as many people think.
Of 68 S.& P. 500 companies that have reported third-quarter results, 41 failed to meet the September estimates for operating earnings, he said. The median shortfall was 4.3 percent. But 74 percent of companies in the S.& P. 500 that have reported so far exceeded the latest estimates and only 8 percent undershot them, according to Thomson Financial."
In the final month of the quarter, companies do some "fancy footwork" to bring down estimates. They restate earnings from previous quarters, making the present growth seem more robust, according to Mr. Biggar. "There is a penchant by companies to make this year's number look good but to make last year's number look bad," he said.
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Interesting...
sorry - you already referred to what i posted... should have checked that link...
well, now that you are aware of that, its not spin, its an observation, and we can do with it what we will...
thanks!
Earning expectations management is very old technique. The analyst who have discovered it now probaly are new to markets. This has been going on for years. Even my grandma knows about it.
As to company buybacks, this is not this quarter phenomenon, it has been happening for last two years.
They aren't saying that
1) earnings expectation management and 2) share buybacks are brand new for this quarter...
i guess their take home message is that these things should be taken into consideration...
the next question becomes what were the levels of earnings expectation management during the previous quarters? they dont address that...
also, what do quarters and earnings look like when earnings expectations dont have to be managed down, like in this current quarter...
agree, share buy backs have been going on for some time now, but i am wondering, might we be feeling their effects now? this is a monster that i am not familiar with.
i am not interested in spinning these things, i just find the debate interesting, regardless of how i might use this information to influence my trading...
It happens every quarter. This is 12 the or 13 the consecutive quarter where management and analyst have predicted slower growth and then when actual earning comes it is better.
The other trick is what Ford did this week. Put all bad news in one quarter.
Many times companies paint a very grim picture of their business to drive down expectations. Look at homebuilders actual earnings and don't listen to the spin. The reason for this is if you paint grim picture you can reduce headcount, drive down empoyee expectations of bonuses etc. That is the reason buying on worse guidance at 52 week low makes money. Things always look very grim after a large drop. There are several strategies based on this and have very good statistical edge.
The Zacks commentary which I link to often is the best place to get objective earning outlook. Rest of the people just spin it to fit their hypothesis.
Remember Barry Ritholtz has predicted Dow 6800 by this year end so obviously he has to discount good news to keep his followers still interested.
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