Earnings expectations are far more important than the earnings themselves -- at least, if those expectations have been built into share prices. This earnings season, it looks as though they have.
Bank of America's Savita Subramanian, head of U.S. equity and quantitative strategy, pointed out that U.S. companies that have beaten expectations with their earnings and sales so far this reporting season have seen their shares outperform 2.5 percentage points in the five days following their reports. Those that missed on their earnings and sales expectations underperformed by 3.1 percentage points.
Trouble is, outperformance has been relatively rare this season. According to Ms. Subramanian, among the 290 companies within S&P 500 companies that have reported their quarterly results so far, just 51 per cent have topped earnings expectations on a per share basis. Sounds alright at first glance, but not when you consider that this is the worst "beat" rate since the fourth quarter of 2008, when the U.S. corporate landscape was mired in tremendous uncertainty owing to the devastating financial crisis and recession. Since the recovery began in the second quarter of 2009, the earnings beat rate has averaged 60 per cent.
Meanwhile, just 48 per cent of companies within the S&P 500 have beaten sales expectations this reporting season, versus an average of 61 per cent since the second quarter of 2009.
"The high number of misses this quarter has largely been attributable to a tough quarter for Financials and headwinds from a stronger dollar, lower natural gas prices, and European weakness," she said in a note.