Earnings and expectations

We came in to this earning season with high expectations. Market had rallied for almost 6 month coming in to earnings with most stock at top of range with earnings priced in. As the earnings season is progressing the earnings trend so far are not as impressive as in the last couple of earnings season. But things will become clearer by next week. While there has been a slowdown, it is not as dramatic as some perma bears are claiming it to be. Remember same perma bears had same thing to say about earnings coming in to July earnings season.

Not as Positive as in the Past

With 14% of the S&P 500 reported, the fourth quarter earnings season is ramping up fast. This week over 400 companies in the Zacks database (125 are in the S&P 500 index) are scheduled to report making it the busiest earnings week of the season so far. While positive surprises are handily exceeding disappointments, the ratio pales in comparison to what we saw in the first three quarters of the year. But with the bulk of reports still ahead, it’s still anybody’s game. At this point median fourth quarter growth stands at 12.4% and the surprise ratio is hovering around 2.2:1. At a similar point in the previous three quarters, the surprise ratios stood at 6.2x, 8.0x, and 7.3x, in the first through third quarters, respectively. The median expected growth rate for all the firms in the S&P 500, reported and unreported, is 9.8%.

The Financials sector, with nearly 35% of firms reported, has the most useful data out thus far. Here, median fourth quarter earnings growth sits at a healthy 15.3% and positive surprises outnumber negatives by over 2 to 1. However, while over one third might seem like a decent sample, the early reporters are concentrated in different industries (brokers) than those yet to report. The median surprise for the sector has been an impressive 2.4%. To get some forward guidance on possible disappointing sectors, we turn to Tech and the Industrials. Both of these sectors have relatively low positive to negative surprise ratios and this could potentially lead to choppy results. Again, these are just preliminary predictions. By the end of next week, we will have quite a bit more data to work with.

Coming later:
Earnings Expectation Cycle and the Cinderella Strategy