Corporate Earnings, Investor Sentiment, US Economy

Earnings Expectations

By, 07/29/2008

Story Highlights:

  • So far, 249 companies in the S&P 500 have reported second-quarter earnings.
  • Earnings results have been mixed, but reactions have been mostly negative.
  • But focusing on one troubled area tells you no more about the overall economic health than by looking at the big winners.
  • Though it's hard to detect from headlines and a bumpy market, there's good news to be found from Q2's earnings announcements

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Earnings season is well underway. So far, 249 S&P 500 companies have reported second-quarter earnings. Both results and reactions have been mixed, but while results on average beat estimates, Monday's reactions seemed mostly negative.

Street Begins Week With a Thud
By Steve Schaefer, Forbes
http://www.forbes.com/markets/2008/07/28/briefing-midday-earnings-markets-equity-cx_ss_0728markets15.html

Oil vs. Banks: A Fight With No Winners
By Mark Gongloff, The Wall Street Journal
http://online.wsj.com/article/SB121720610309788767.html?mod=hps_us_at_glance_markets

But are earnings all that bad? It's forecasted the S&P 500 will see overall second-quarter profits drop 17.9% from the year prior. On the surface, that doesn't seem great, but we wouldn't be surprised to see earnings overall do better than expected. Of firms reporting so far, 67% beat their earnings estimates. Even many Financials firms, though announcing less than stellar results, are beating performance expectations. It's just as easy to focus on those companies that missed—and missed big—as it is to ignore those firms, or even those entire industries, that are doing just fine or even splendidly. But focusing on one troubled area tells you no more about the overall economic health than by looking at the big winners.

Truth is, Financials are indeed struggling (which likely colors the current too-dour economic view. See our cover story "Pessimistic Prognosticators Aplenty," 07/18/2008). None of this is surprising based on the big asset write-downs we've seen in recent quarters. But recall: All economic sectors do not move in lockstep. Never have! Remember, though folks mourn the stumbling housing sector today, it provided a bright spot during the last bear market and recession. And despite the seeming lack of respite from Financials, overall earnings troubles really do seem to be isolated. In fact, though it's hard to detect from headlines and a bumpy market, there's good news to be found from Q2's earnings announcements.

Look Again - There's Good Earnings News
By Paul R. La Monica, CNNMoney.com
http://money.cnn.com/2008/07/28/markets/thebuzz/index.htm?postversion=2008072810

Strip out troubled Financials earnings, and overall reported earnings grew 7.7%.* Some may complain it's not fair to strip out the worst performing sector. If we remove the best performing sector too—Energy—the latest earnings growth numbers average 2.8%.* It's not stellar, but it's growth—and it's better than most are expecting. It'll still be a while before we know if earnings finish as down as forecasted, but it seems fair now to say investors are likely to be positively surprised.

Volatility has been a hallmark of the current market for some time, and so have doom-and-gloom expectations. But expectations do not affect a company's underlying business performance. As long as US companies—not to mention companies worldwide—continue to benefit from a growing global economy, earnings will likely weather current dour expectations with surprising strength.

* Thomson Reuters, as of 07/25/2008

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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