Earnings Are Beating Estimates, but the Indices Aren’t Getting Much of a Lift

As of Friday, 406 of the S&P 500 companies had reported earnings for the second quarter of 2018. Of those companies that have reported, 79% have beaten analysts’ estimates, 5% have met estimates, and 16% have come in below estimates. Given this information, you would expect the indices to be gaining ground, but they are only up modestly since the earnings season started on July 13. Since the start of earnings season, the Dow is up 2.16%, the S&P is up 1.5% and the Nasdaq is down 0.15%.

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How can that be? Were investors expecting too much from earnings? Are investors more concerned about the trade dispute than earnings reports? I can’t really answer that. Heading into earnings season I didn’t think investor sentiment was overly bullish and I said so in an article on July 10. I did express concern in that article that companies could cite the trade disputes as a reason to lower forecast for future quarters and that has happened on a few occasions, but not enough to dampen investor reaction for the indices as a whole.

Looking at the different sectors, the healthcare sector has been the best sector in terms of companies beating expectations. Out of 52 companies that have reported, 94% have beaten estimates, 2% have matched, and only 4% have missed estimates. The Healthcare Select Sector SPDR (NYSE: XLV) is up since earnings season started, but it is only up 2.95%. I would have thought it would be up more than that given how many companies have beaten estimates.

We see a similar story from the consumer staples sector where 21 companies have reported with 90% beating estimates, 5% matching, and 5% missing. The Consumer Staples Select Sector SPDR (NYSE: XLP) is up 3.61% since July 12. The sentiment toward the sector was probably as pessimistic as any toward as it is getting hit with the tariffs more than others it seems. Companies like Coca Cola, Campbell Soup and others have reported price increases to offset the rising prices of steel and aluminum used in the packaging of their products.

The consumer discretionary sector is an interesting one. The sector has seen 46 companies report earnings with 80% beating estimates while 4% matched and 15% missed. The Consumer Discretionary Select Sector SPDR (NYSE: XLY) is down 0.43% since July 12.

The tech sector is another one where the numbers and the performance don’t really match up. There have been 54 companies report and 89% of those have beaten estimates. Only 4% matched and 7% missed estimates, but the Technology Select Sector SPDR (NYSE: XLK) is only up 0.14% since earnings season started.

The worst sector in terms of companies not beating expectations has been the energy sector. There have been 27 companies that have reported so far and only 44% have beaten estimates while 7% matched and 48% came in below analysts’ estimates. That means the Energy Select Sector SPDR (NYSE: XLE) is getting crushed, right? Wrong, it is down a grand total of 0.82% since July 12.

Earnings season is beginning to die down and for the most part you would have to consider it a strong earnings season in terms of companies beating expectations. However, it concerns me that we haven’t seen stocks react in accordance with the earnings reports. Sure the sentiment toward each sector was probably very different ahead of the earnings season, but the overall performance of the indices should be better than what it has been.

Are investors expecting too much going forward? If they are, we could be setting up for another big drop in the fall.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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