- Thus far, US earnings have been strongly positive and overwhelmingly surpassing expectations.
- Globally, companies are healthy and their outlooks are promising.
- Today's dour sentiment serves to suppress expectations, meaning earnings will likely not only be positive, but surprisingly so—additionally bullish.
Earnings season kicked into full swing this week, with 122 S&P 500 firms scheduled to report. But already, early in the season, investors have reason for optimism. Thus far, earnings have been strongly positive and overwhelmingly surpassing expectations. The rest of the season looks just as bright—the estimated earnings growth of the S&P 500 for Q2 2010 is 28%.* If the S&P 500 meets (or exceeds) expectations, it will mark the third consecutive quarter of earnings growth for the S&P 500, after nine straight quarters of year-over-year earnings declines (Q3 2007 – Q3 2009).
The surprisingly robust earnings reports are the result of a confluence of positive factors—proving negative sentiment can't hold back positive economic fundamentals forever. Globally, companies are healthy and their outlooks are promising. In fact, earnings growth rate estimates for the S&P 500 for the next four quarters are 25%, 32%, 12%, and 18%, respectively.* Terrific growth, and certainly not indicative of impending economic doom.
Economically sensitive categories like Tech, Industrials, and Materials are faring particularly well—not what usually happens in a sluggish or shrinking economy. 100% of Industrials and Materials firms reporting earnings so far have beat expectations—and Industrials and Tech reported the highest percentage earnings increases. Not to be left out of the fun, Financials posted earnings growth of 9% so far this quarter—underscoring the overall improving health of this vital sector.
Just some (of the many) factors underpinning the strong earnings this quarter and for at least the next few:
In the face of ongoing pessimism and calls for a "new normal" (or the like), US and global firms emerged from the last two years leaner and more efficient than ever. An uptick in sales, even a small one, can translate into larger-than-expected earnings for efficient firms in such an environment.
Fast-growing Emerging Markets (EMs) are major sources of growing demand as evidenced by increased imports in major EM nations. For example, Brazil's imports are up 89.3% from February 2009. Imports into China are up 128.6% from February 2009, just shy of the March 2010 all-time high. That's a lot of goods they are gobbling up from both developed and developing economies. (EMs aren't the only source of global demand. China is importing a lot, but Chinese exports increased an astounding 117.4% to reach an all-time high in June 2010.)
Enough about trade—US corporations are sitting on a mountain of cash. But that cash itself isn't bullish. Spiking corporate liquidity has historically been a terrific indicator of future increased business spending—which is bullish for stocks. And it appears businesses are already beginning to spend, evidenced by the recent uptick in technology spending. But the spending wave has likely only just begun, and should hit the economy more broadly as firms move beyond long-overdue technology upgrades to spending on R&D, marketing, and hiring, for example.
Meanwhile, today's dour sentiment serves to suppress expectations, meaning earnings will likely not only be positive, but surprisingly so—additionally bullish. We're not suggesting you pop the bubbly yet, but it's shaping up to be a fine earnings season.
*Source: Thomson Reuters This Weeks in Earnings 7/16/2010