Why the market cheers mediocre results

Bad earnings are still bad, even if they were expected.

By Jonathan Berr Jul 18, 2012 6:03PM
Image: Broken-Pencil (© Christian Zachariasen/Jupiterimages)This quarter is proving that mediocre corporate earnings are sometimes good enough to appease Wall Street.

(MATreported Tuesday that profit rose 20% to $96.2 million, or 28 cents a share, as price increases offset rising costs for raw materials even though revenue was little changed at $1.16 billion. Goldman Sachs' (GS) second-quarter net income plunged 12% to $962 million, or $1.78 per share. Revenue at the New York investment bank fell 9% to $6.63 billion. Coca-Cola's (KO) quarterly profit barely budged and revenue rose 2.7% to $13.09 billion.

Yet these are all Wall Street "winners."

The numbers from Mattel, Goldman Sachs and Coca-Cola underscore the silliness of earnings season -- a dance every quarter in which billion-dollar companies attempt to hit a target devised by a dozen or so people. A company's underlying performance is secondary as long as expectations are met. At times, especially with high-flying tech stocks, investors will demand not just a "beat," but a large beat.

Warren Buffett has argued for years that the game of managing earnings expectations encourages companies to think about short-term gain. Of course he's right. Heaven help the corporation that announces plans to invest in its business for the long haul instead of boosting the dividend or some other short-term fix. They will surely be punished and their shares beaten down in the stock market.

Investors should take no comfort in the earnings beats at Mattel, Goldman Sachs and Coca-Cola because the results may not be sustainable. The latest economic data is not encouraging. Consumer sentiment fell to unexpected lows in the most recent quarter, which could mean a disastrous holiday season for retailers. Growth in China, a key U.S. market, is slowing, though it's difficult to say to what extent given Beijing's tendency to color the truth. The crisis in Europe seems to never go away, as does the threat of the U.S. economy diving off a fiscal cliff. Optimism is in short supply and will be for a while.

Let me clear: Quarterly earnings are important, as is the opinion of Wall Street. But they aren't everything. What gets lost in the earnings expectations game is that terrible earnings are still terrible earnings, even if they are not as awful as some had expected.

--Jonathan Berr does not own shares of the listed stocks.  Follow him on Twitter@jdberr.
Jul 18, 2012 7:05PM
I disagree. Wall Street rallies behind stocks each quarter as a hedge against Short positions. If they invested according to performance, the company would be double whammied. It's a desperation scam.
Jul 19, 2012 1:37AM
What's important now is that the stock market has become an eual with Las vegas with even better odds.  If earnings and data do as expected or better then the market rallies, if numbers come out bad then the FED is there only mentioning E and the market Rallies.  Easiest money you will ever make just don't short the market while Uncle Benny is still at the helm coddling Wall ST and destroying any purchasing power our dollar had.  Yes it will come to an end as all Ponzi schemes do and it will be the epic disaster the FED and Wall St. say won't happen.  But since our elected officials are incompetent, and most younger people are to busy on their Iphones or watching Reality TV to care, the slow destruction of this country will continue on......
Jul 18, 2012 10:07PM
Most companies should be rewarded for short term performance.  In today's fast paced marketplace where conditions and fickle consumer tastes can change in a matter of months, does it really make sense to make large investments in infrastructure in a 3 to 5 year (or longer) timeframe?
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