What earnings season is saying about road ahead

A messy earnings season has given investors some discomfiting things to mull.

By MSN Money Partner Jul 30, 2013 2:49PM

Stock investor © Tom Grill/CorbisCNBCBy Jeff Cox

 

As corporate earnings season passes the halfway point, results have been good enough but not particularly good, signaling that a hoped-for strong surge in the second half could be elusive.

 

In fact, were it not for a robust financial sector, profit on the S&P 500 ($SPX) would be tracking negative 1.6%, according to Bank of America (BAC) Merrill Lynch consensus estimates.

 

That two-thirds of companies are beating estimates seems almost beside the point: The Wall Street view had gotten so low ahead of the reporting season that anything fogging the mirror would have been an upside surprise.

 

Instead, investors have been left to sort through the numbers to find companies that stand out.

 

"The trajectory of estimates had been sharply negative leading into the reporting season, enabling companies to beat a lowered bar," Adam Parker, chief market strategist at Morgan Stanley, said in an earnings analysis. "Nevertheless, fundamentals appear to be in focus as the market is differentiating between companies, with misses being punished and beats being rewarded."

 

The earnings scorecard shows nearly 300 companies on the S&P 500 reporting, with 66% topping Wall Street expectations.

 

However, just four of the index's 10 sectors are seeing earnings growth, with financials boasting a whopping 24.7% increase and materials showing an ugly 11.7% loss. Of the six positive sectors, industrials are barely above water and healthcare is tracking at less than a 2% increase, according to S&P Capital IQ.

 

Actual revenue growth has been even less attractive.

 

Sales have grown just 1.7% on an annualized basis, though about 56% of companies are beating expectations. Excluding financials, the revenue gain is just 1.2%.

 

The outlook is not particularly encouraging, either.

 

Of the 54 companies that had provided guidance through Friday, 20 were negative, 14 positive and 11 in-line -- particularly troubling considering that current expectations are for 4.9% third-quarter growth and 10.8% in the fourth quarter.

 

Overall, earnings per share for the entire index have risen to $27.13, 1% higher than projections at the start of the season.

 

Companies that have beaten on both earnings and sales are outperforming the S&P 500 by 2.3 percentage points in the five days after reporting, BofAML said. Companies missing on both have under-performed by 5 percentage points in the five days after and by 8.4 percentage points since the beginning of earnings season.

 

Conventional wisdom, though, that investors would focus more on sales than profits has not necessarily held up.

 

"Earnings may be more of a focus than sales, as performance spreads generated by earnings beats and misses have been more pronounced than those based on top-line surprises," Savita Subramanian, equity and quant strategist at BofAML, said in a note.

 

One telling factor about investor psychology is that earnings misses have been punished far more than beats have been rewarded, likely in reaction to a failure to beat such modest expectations.

 

Companies that have fallen short of Wall Street's view have fallen an average 2.56% on their reporting day, Bespoke Investment Group said, while those that have beaten gained just 1.34%.

 

One interesting bit of trivia: Information technology has shown a 6.1% decrease in earnings yet has the highest beat rate at 71.3%.

 

So while the market's path of least resistance has been clearly higher, a messy earnings season has given investors some discomfiting things to mull.

 

"Consumer discretionary and technology stocks that have missed estimates have gotten crushed," Bespoke said in a report. "Investors were clearly expecting a lot out of these sectors heading into earnings season, and companies that have not lived up to expectations have been taken to the woodshed."

 

More from CNBC

Tags: $SPXBAC
2Comments
Jul 31, 2013 7:20AM
avatar
The estimates are lowered each quarter and then we hear that stocks are beating their estimates without mention of the lowered numbers.  Then we hear we are in a recovery because of how great the market is doing.  Seems like a  scheme to me.
Jul 31, 2013 7:55AM
avatar

Earnings should be increasing at least as fast as M2.  i.e.  11%.   The fact that they are not point to slowing economy, not one gaining.   We shall see in the GDP numbers.   If the GDP numbers come in at less that 1.8% I'd say look out below.  There is a real chance they could come in 1.4-1.6 range.

 

And while dollars grow, unit shipments continue to fall.  Business appears to have been wise to build up cash reserves.

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

126
126 rated 1
286
286 rated 2
474
474 rated 3
680
680 rated 4
626
626 rated 5
609
609 rated 6
620
620 rated 7
462
462 rated 8
304
304 rated 9
132
132 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
BIDUBAIDU Inc10
BXTHE BLACKSTONE GROUP L.P10
CELGCELGENE CORP10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.