A Look at the Earnings Results So Far: Better than Expected

As of May 3, approximately 78% of the stocks in the S&P 500 had reported earnings results for the current earnings season. With all things considered, the quarter has been better than expected.

According to a recent report from FactSet, 76% of those companies that have reported so far have beaten the EPS estimates. That is better than the long-term average of 65%, but in line with what we have seen for the last four quarters. The revenue numbers aren’t as impressive with 60% of companies beating the estimates. This is in line with the long-term average, but below the 67% we have seen over the last four quarters.

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I have written several articles about how earnings were expected to decline this quarter, and the overall estimates were for a decline of 2.3% compared to the first quarter of 2018. So far the earnings declines are coming in at -0.8%. While the numbers are better than anticipated, it is important to note that the earnings for S&P stocks haven’t shown a year over year decline since the second quarter of 2016.

Looking at the main sectors, the tech sector has seen the greatest percentage of earnings beats at 89%, and it is followed closely by the healthcare sector which has seen 85% of companies beat estimates. The utilities sector has been the worst performing group in terms of actual results beating estimates with only 48% of companies doing so.

The revenue results show that 77% of healthcare stocks have beaten estimates while tech companies have beaten 74% of the time. The materials sector has been a big laggard in this area with only 20% of companies beating the revenue estimates.

One area of concern is the number of companies that are lowering guidance moving forward. Not all companies have updated their guidance, but of the 70 that have guided for the second quarter, 56 have lowered the guidance while only 14 have increased the guidance. This has had a huge impact on the reaction in the stocks after the earnings reports.

Looking at the results for each sector and the percentage of stocks that have beaten EPS estimates, I decided to put together the following table. It shows the percentage of stocks beating estimates and then it shows the return of the select sector SPDR for each sector since the earnings season started on April 12.

Obviously there are other factors that influence the prices of the stocks and thus influencing the SPDR ETFs—the price of oil and its impact on energy, the trade war’s impact on the tech sector, etc. What the table shows is that the performance of the EPS beats has had little impact on the overall returns.

Looking at those results, I decided to build the same table using the revenue results to see if the correlation would be any better. The results did seem to correlate a little better with the energy sector and materials sector being at the bottom in terms of returns as well as revenue beats. But the healthcare sector had the highest percentage of companies that beat on the revenue estimates and the return since April 12 was the third worst of the ten.

The results of these two tables aren’t necessarily what I set out to find, but after putting them together and looking at the results, it confirmed something that I repeatedly state about earnings. Beating EPS and revenue estimates doesn’t really matter, it is the reaction by investors that you should be focused on.

In the articles I write for Seeking Alpha, most of which are earnings previews, I am constantly asked in the comments, “Will the company beat the estimates or not?” When I answer those questions, I almost always say what I said above—don’t focus on whether the company beat estimates or not, pay attention to the reaction of investors. This is the whole reason I look so closely at the sentiment indicators ahead of earnings reports.

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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