With over 59% of the S&P 500 reported, third-quarter earnings results thus far have been a positive surprise and show a clear win for the bulls. Median reported EPS growth sits is 12.3% and positive analyst surprises outnumber negatives by over 4:1. It seems that investor’s low expectations for third-quarter earnings reports have proven unfounded. Though there are still over 200 companies in the index left to report, it’s clear that the market’s recent run-up now has a leg to stand on.
The sentiments were extreme in August and the general cosensus was earnings will be lacklustre. By August anticipation of next earning season started and smart people had figured out that the earnings will infact be good, so they started buying in anticipation. Sometime stocks react in anticipation, sometime after earning. Now if you were not the smart money which has access to information about future earnings, you still could have got the same earning edge free.
Just keep a very close watch on earnings/earnings estimates/pre announcements trends. Here is what Zacks had to say on 7th August 2006 and about which I blogged here.
The overall market continues to consolidate near the recent low. Expect a possible move up in to next earning season. If you ignore the bearish noise from big picture types, you will notice the earnings have been very good so far and earning projections are not expected to go down.Earnings Data: No Recession Soon
by Dirk Van Dijkr>Aug 07, 2006
The summer earnings season is wrapping up and the S&P 500Â’s growth numbers have been a pleasant surprise. Of the 413 (82.5%) companies within the large-cap index that have reported, the median second quarter EPS growth is 13.1%. The median surprise is an impressive 3.9% and positive surprises have outnumbered negatives by over 4:1.
With so many positive surprises flooding reports this season, a market rally wouldnÂ’t have been out of the question. But thatÂ’s not whatÂ’s happened. In fact, the S&P 500 is actually down almost 3% over the last three months.
So what gives? Well it seems to be a combination of factors. The The Israeli/Lebanon conflict, volatile energy prices, and choppy jobs and retail sales reports, weaker than expected GDP growth and higher than expected inflation numbers have investors biting their nails and holding their cash. In short as the “E” has been moving up, the P/E has been moving down, leaving the “P” basically unchanged (although very volatile from day to day).
So what is happening in the market is new leadership is emerging. The sectors which have done well in the past like oil and commodities have not seen any up move in this phase infact some of the stocks in these sectors are heading down. New set of companies have emerged in retail and technology sector to lead higher. Retail seems to be having some nice breakouts currently.
I continue to find some good opportunities like INPH, PWEI, DK, NUHC,AETH, STEC, etc. I am also eyeing some techs like RIMM and retail like AEOS, ANF, BEBE, MWRK etc. If you look below the surface some good opportunities are setting up on both long and short side. It is a stock pickers market.
If you were reading the earning trends weekly analysis it was constantly saying the same thing, E is not the problem, P is the problem. It kept on saying earnings will be most probably better than what analyst are expecting. Zacks is not the only site which does earning analysis, S&P, Reuters, Bloomberg all do weekly earnings trend analysis and keeping tab on it can give you the smart money edge.
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