Big Picture- Earnings

The third-quarter earnings season is coming to a close and it appears to be a layup win for the bulls. From the beginning there has been no doubt, as one positive surprise came in after another. And the trend has yet to let up. Nearly 89% of the S&P 500 companies had reported, and positive EPS surprise’s still outnumber negatives by over 3:1. The median surprise is an impressive 3.2% and median growth thus far is 12.3%.

The growth leaders are the Energy and Materials sectors. Energy has shown much greater strength than expected, with median growth of 27.5% and a surprise ratio nearly 5:1. The tougher commodity price comps haven’t hit the sector as hard as expected, and oil field service firms like Schlumberger (SLB) and Baker Hughes (BHI) have been picking up the slack for lagging E&P’s. Looking ahead to the fourth quarter, however, it is clear that the sector’s comparable growth is expected to lag, potentially dropping to less than 1%. Recall that last year’s fourth quarter results were so good that they prompted a congressional hearing. That’s a textbook tough comp. Also showing strength, the Materials sector boasts median growth of 21.5% and a healthy surprise ratio of over 2:1. Big upside surprises here came from Nucor (NUE) and Praxair (PX).
The growth laggard thus far continues to be Consumer Staples, with median growth of only 6.3%. This is more favorable than expected however, as the sector’s surprise ratio is over 3:1, with a median surprise of 1.9%. The two earnings surprise leaders for the sector were Estee Lauder (EL) and Supervalu (SVU). Food firms Conagra (CAG) and McCormick (MKC) also posted double-digit surprises. The Financial and Telecom sectors are also lagging with single digit growth.

Now that 90% of the earnings are in, the earnings picture explains to a large extent why the market rallied since July. You can look at it is as an after the fact explanation, but consistantly, the Zacks analyst was pointing out even 8 weeks before the earning season started that earnings are likely to be very good.

If you see the sectoral earning trends and keep track of them, by middle of the next earning season, you would also with lot of certainity predict which sectors are likely to have good earnings and enter individual stocks based on probable earning surprises.