The beginning of each earnings reporting season is always met with much anticipation, and this week was no different, after traditional first-out-the-gate blue chip Alcoa gave the first-quarter season its unofficial start. But after all the analyzing, navel-gazing and market-gyrating surrounding this first batch of results, we had to ask: Do they really tell us much about how the overall earnings season will unfold?
We asked Thomson Reuters Research to run some numbers for us and find out. The data suggest that over the past five years, early reported earnings have been a poor indicator of the overall reporting season - both in terms of earnings growth, and how closely the earnings track the Street's expectations.
EARLY BIRD IS OUT TO LUNCH
John Butters, senior research analyst at Thomson Reuters, looked at the year-over-year earnings growth of early reporting S&P 500 companies (he defined "early" as any company that reported either before Alcoa or in the same week as Alcoa), and compared them to the actual total earnings growth reported by all S&P 500 companies. He did the same thing for the "earnings surprise factor" - a statistic Thomson Reuters tracks for the net percentage by which S&P 500 earnings exceed (or fall short of) analysts' consensus estimates.
(Mr. Butters excluded data from the earnings tailspin of the 2008 fourth quarter because the early reporters posted losses in the quarter - rendering percentage-change calculations meaningless.)
"As you can see, there is little correlation between the numbers of the early reporters and the final results," he said. "Although on average the surprise factor is relatively close (2.3 per cent v. 2.9 per cent), there are large differences in nearly all the individual quarters."
Mr. Butters said that typically, the overall trend of an earnings season isn't established until roughly half the S&P 500 companies have reported. The early reporting group in this statistical analysis represents only about 7 per cent of the index.
Given the importance to the market of the earnings performance relative to expectations, it's particularly dismaying how often the early reports not only get the scale of the earnings surprise wrong, but even its direction.
Five times in the past nine quarters, the earnings surprise factor for the early reporters (whether negative or positive) has been in the opposite direction of the eventual surprise from all S&P 500 companies.
SHOOTING LOW LATELY
One notable trend over the past couple of years is the increased tendency for the early reports to understate the quarter's earnings strength.
Going back to the fourth quarter of 2007, the year-over-year earnings growth for early reporters has come in weaker than the final overall numbers 75 per cent of the time. The earnings surprise readings also undershot the eventual overall total in four of the past five quarters.
David Parkinson