Fisher Investments Editorial Staff
Corporate Earnings, US Economy

Rocky Earnings

By, 04/27/2010

Story Highlights:

  • As of last Friday, 83% of reporting S&P 500 companies posted higher-than-expected earnings, with 69% topping their revenue estimates.
  • If current Q1 earnings reports are any indication (and they likely are), the forecasts could again prove too low as they have for the last eight quarters.
  • Encouragingly, thus far, 9 out of 10 sectors in the S&P 500 are reporting positive Q1 earnings growth from the prior year, with Financials, Materials, and Consumer Discretionary leading.
  • Though only a little more than a third of S&P 500 companies have reported, overall, the numbers show analysts continue to underestimate firms' earnings potential.

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Rocky Balboa was an underdog against a host of challengers in the many, many, many iterations of Rocky movies. Since economic recovery began early last year, an Italian Stallion-esque battle has been brewing between an underrated economic reality and dour expectations. Fortunately, reality keeps delivering rosy blows. The latest? Thus far, companies' Q1 2010 earnings are solidly trouncing analysts' too-cautious expectations.  

As of last Friday, 83% of reporting companies in the S&P 500 posted higher-than-expected Q1 earnings. Many skeptics still contend recent earnings have been driven by cost cutting and not improving sales. This is true, but common following recession, and those same skeptics might be surprised to learn 69% of firms are topping their revenue estimates, reflecting a stronger global economy. Lean firms and an improving economy bode well for earnings looking forward, but it might be awhile before analysts catch on. 

There's a human tendency to doubt events can tilt overly positive following a negative experience. At the start of the year, analysts' consensus for 2010 earnings per share (EPS) growth was 29% for US companies and 34% for firms in non-US developed countries. If current Q1 earnings reports are any indication (and they likely are), the forecasts could again prove too low as forecasts have for each of the last eight quarters. Already, the Q1 blended earnings growth rate (combining actual earnings and estimated earnings) for S&P 500 companies stands at 50%.*  

Encouragingly, 9 out of 10 sectors in the S&P 500 have so far reported positive Q1 earnings growth from the prior year. The Financials, Materials, and Consumer Discretionary sectors are leading y/y growth rates at 347%, 178%, and 125%, respectively. (The lagging sector, Utilities, has so far reported a 3% earnings decline). It's true a year ago the economy was mired in a steep recession, but these jumps show a far healthier recovery than most analysts deemed possible (and from their estimates, likely still doubt).  

Though only a little more than a third of S&P 500 companies have reported, overall, the numbers show analysts continue to underestimate firms' earnings potential. If the percentage of US companies beating earnings expectations holds at 83%, it'll be the highest since at least 1994. (The current record holder is Q3 2009's 79%.)  

If EPS growth just matches expectations and stocks return less than about 30% this year, P/E ratios will actually shrink—a possibility few envision right now. This isn't a prediction for a greater than 30% year for stocks, but the notion stocks could post great returns and valuations multiples could actually fall is unthinkable to most and another sign valuations aren't concerning for stocks broadly. As a brighter reality trumps dour expectations, the bout between pervasive pessimism and the underrated economic reality is turning one-sided. Human doubt can only throw so many futile jabs at an increasingly evident recovery before throwing in the towel. 

*Source: Thomson Reuters

 

*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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