Home > News & Commentary > The Half-Way Point: Earnings Season Observations (SPY, QQQQ, DIA)

The Half-Way Point: Earnings Season Observations (SPY, QQQQ, DIA)

stocksSo far this earnings season, 77% of companies have posted EPS numbers in excess of their estimates.  This is extremely high from a historical perspective, and shows just how much the street analysts have underestimated the recovery in the market.

As we have said before, however, this earnings season is all about revenue.  It is much easier for a company to post good EPS numbers as they slash costs by cutting staff and capital expenditure.  Much harder to manufacture is revenue numbers, and this earnings season is separating the former from the latter. This helps explain why, despite the high percentage of EPS beats, the average stock has actually declined 0.72% on its reporting day (Source: The Bespoke Investment Group, found here).

I noticed this trend during last quarters reporting season.  The companies that reported first all benefited from EPS expectations that had not been adjusted up enough to match the cost cutting that was being implemented.  During first few weeks, the majority of companies beat expectations, and their stocks took large leaps on those days that they posted.  The euphoria spread to their respective industry peers, and by the midway point the market was feeling pretty good.  However, while formal expectations didn’t increase drastically, whisper numbers for the later-reporting companies did until finally they were too high.  So when those companies actually reported, they fell short and the stock dropped.

I have no insight as to whether this will happen this earnings season, but I would say it is a definite possibility, especially in industries like health care and technology where the vast majority of companies have seen large jumps in share price as they handily beat expectations.

-AH

Disclosure: Long T and MSFT.

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