A board is seen overlooking the floor of the New York Stock Exchange on Friday, May 3, 2013.Richard Drew/The Associated Press
Good things are happening now that U.S. earnings expectations are so low: When companies clear them, relieved investors cheer.
General Electric Co., PepsiCo Inc., Goldman Sachs Group Inc. and Morgan Stanley are among the latest S&P 500 members to top analysts' estimates after they reported their first-quarter results on Thursday.
All four stocks rose, and by more than 3 per cent in the case of Morgan Stanley.
But while some companies are performing better than expected, these standouts mask an overall trend that is nowhere near as encouraging, suggesting that the S&P 500 could be struggling for direction as the earnings season unfolds.
With the latest batch of earnings, 82 of the 500 companies in the benchmark index have now reported their first-quarter results. That means the season is still in its early stages since Alcoa Inc. officially kicked things off on March 14. However, there are enough data to provide some inkling of where things are going.
According to John Butters, senior earnings analyst at FactSet Research Systems, 66 per cent of companies have beaten analysts' estimates for earnings and 50 per cent have beaten estimates for sales.
That sounds good, but it is actually below recent averages. The earnings "beat" rate over the past year is 71 per cent, and over the past four years it is 73 per cent.
Companies are also beating expectations by a slimmer margin, averaging just 1.9 per cent in the current earnings season versus a four-year average of 5.8 per cent, according to FactSet.
More worrisome, earnings reported so far have declined 1.3 per cent over the first quarter of 2013, putting them on track for their first dip since the third quarter of 2012 and in line with gloomy predictions among analysts heading into the reporting season.
Some strategists have argued that investors are likely to look beyond first-quarter results and take a more upbeat view of the year ahead.
That's because the unusually harsh winter is widely blamed for weighing down economic activity, with recent upbeat reports on jobless claims and manufacturing activity suggesting that things are now improving.
"The more data we see on economic activity in March, the more we're reassured that the drop-off in the preceding few months was almost entirely due to the unseasonably severe winter weather," said Paul Ashworth, chief North American economist at Capital Economics, in a note.
Now companies need to play along with upbeat forecasts of their own. With 161 companies in the S&P 500 on tap to report their results next week – significantly fleshing out the season – investors will soon find out just how good the year is looking.
David Berman