U.S. companies have been clearing earnings hurdles in record numbers this quarter. But the market is more focused on how low the bar has been set.
With more than 25 per cent of S&P 500 companies having reported their first-quarter results, 80 per cent have exceeded analysts' consensus profit estimates – a record pace, and well above the historical average of 62 per cent.
But the stock market has been falling even as the numbers have hit the presses over the past two weeks. The record "beat rate," as earnings trackers call it, can't gloss over the fact that earnings forecasts have been in decline for months – leaving expectations so low that topping them is a dubious achievement.
"We're still not looking at great growth," said John Butters, senior earnings analysts at market analytics firm Factset Research Systems Inc.
Major earnings-tracking services such as Factset, Thomson Reuters Research and S&P Capital IQ expect S&P 500 year-over-year earnings growth of between 4 and 4.5 per cent for the quarter ended March 31. That would be the weakest profit growth in more than two years.
With roughly half of the S&P 500's revenues coming from outside the United States, the companies that make up the index are feeling the deepening gloom surrounding the European and Chinese economies. Wall Street analysts have been lowering their earnings estimates for the past six months, a process that accelerated in the early part of this year as companies issued a flood of warnings that their first-quarter numbers wouldn't live up to forecasts. Rising energy costs have raised concerns of a further profit pinch.
"That created very low expectations," said Gregory Harrison, corporate earnings research analyst at Thomson Reuters. "Analysts were very conservative [with their estimates] they may have overdone it."
While the overall earnings-growth estimate for the quarter has improved as results have rolled in over the past few weeks, earnings analysts said that a couple of pockets of strength have been masking broader weakness.
Mr. Butters noted that the biggest contributor to the better-than-expected earnings season has been the financial sector – where the main source of upside surprise came not from meaningful growth in revenues, but from smaller-than-expected loan-loss provisions.
"Most sectors are still looking at year-over-year declines," Mr. Butters said, noting that only three of 10 major sectors (financials, technology and industrials) are on track for earnings growth in the quarter.
In the technology group, the story is all about Apple Inc., which will release results after Tuesday's closing bell. The company's profits are expected to have soared more than 55 per cent from a year earlier. The computer giant's profit numbers are so big that they are expected to contribute about 1.5 percentage points of S&P 500 earnings growth all by themselves.
Analysts said the key for investors over the next couple of weeks will be the guidance on future earnings that many companies provide in conjunction with their results. Mr. Harrison of Thomson Reuters said only eight companies have issued guidance to date.
The early trend shows a preponderance of companies lowering their earnings forecasts – perhaps a continuation of the large numbers of profit warnings during the first quarter. But Mr. Harrison cautioned that the sample size is too small to draw any conclusions.
David Parkinson