Earnings Season Kicks Off, Here is the Outlook

Earnings season kicked off two weeks ago with the big banks reporting on July 14. Since then we have gotten a spattering of reports from other sectors with a number of big tech stocks reporting last week. This week is a big one as a number of the FAANG stocks report on Thursday—Facebook, Apple, Amazon, and Alphabet (Google) all report on that day.

Of the 25% of the members that have reported so far, the percentage of companies beating earnings estimates is running higher than the historical average. While I find that to be interesting, I think it is a testament to how much the estimates had been ratcheted down. As I pointed out in my article from July 8, expectations were the worst they had been since the financial crisis.

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Digging in to the numbers reported so far, 80.5% of companies have beaten EPS estimates and that is considerably higher than the historical average of 64.9%. The average over the last four quarters has shown 71.1% of S&P members beating EPS estimates. These results are through last Friday and come from Lipper Alpha Insight.

The revenue numbers have shown 68.8% of companies beating estimates and that is above the historical average of 60.2%. The last four quarters have seen 59.1% of companies beat revenue estimates.

Looking at the sector breakdowns so far, the financial sector has seen the greatest number of companies report, both in terms of total and in terms of the percentage. So far 72.2% of financial companies have beaten their EPS estimates while 25% have missed.

The industrial sector has the second highest number of companies reporting so far and we see that 83.3% of companies have beaten estimates and only 16.7% have missed. We see 100% of companies beating in the materials, real estate, and information technology sectors, but none of those three sectors have seen a significant percentage of companies report thus far.

The revenue results for financials and industrials show slightly lower percentages of companies beating estimates with 69.4% of financials exceeding expectations and 66.7% of industrials doing so.

This data only represents a quarter of the companies, so it’s a little too early to tell whether or not these percentages will hold up as more and more companies release earnings over the next few weeks. The financial sector is the only one where more than half have reported so far.

One concern I have is that financials and industrials were two sectors where expectations were adjusted significantly lower. Now with the tech sector and consumer discretionary companies stepping in to the spotlight, the expectations weren’t ratcheted down as much. In fact, some of the companies have seen EPS estimates adjusted to the upside significantly in recent weeks.

Looking at how the sector SPDR ETFs have performed since July 14 when the earnings season started, the industrial sector has outperformed the others, so the fact that companies are beating estimates appears to be helping. Let me rephrase that though, I looked at performance for the sectors where at least 10 companies have reported—removing utilities, energy, communication services, real estate, and materials from the picture.

Since July 14, 10 trading days, the industrial sector has gained 5.64%. The healthcare sector has gained 4.55%, but a lot of that move is based on virus-related news and not necessarily earnings news. A number of big pharmaceutical companies are reporting this week as well, so the healthcare sector could be a little more volatile this week. The financial sector has gained 2.16% and that is slightly below the gain in the overall market.

It will be interesting to see how the rest of the earnings season plays out, but I personally think the percentage of companies beating EPS estimates and revenue estimates will fall over the next few weeks. I don’t see the 80% figure holding throughout the next few weeks as the hurdles seem to a little higher than they were for financials and industrials.

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.