Our Take on Earnings Season

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Since much is written every quarter about earnings season—and given that we track earnings reports for thousands of companies on an ongoing basis—we figured we’d contribute out two cents to the conversation. After all, earnings are what ultimately drive stock prices, or at least the expectations of what companies are going to earn. We’ll report on earnings season, of course, by the numbers, based on what MarketGrader is showing us (and you, too, if you subscribe.)

On our new web site we have introduced two new Earnings Season Report Cards under the Markets & Economy tab. The first one follows the reports of all companies under coverage and the second one the reports of all companies in the S&P 500 index. This post will focus on the latter.

In our S&P 500 Earnings Season Report Card page we actually display two report cards, one for the earnings season currently under way and one for the immediately preceding one, allowing for a quick side by side comparison. In the current season report card we track the number of companies that have reported to date broken down into those that beat, met or missed their consensus estimate. We display also the two biggest positive and negative earnings surprises (in percentage terms) as well as the two companies whose reports had the biggest impact on the price of their stock. We’ll get into the rest of the report card’s contents in more detail in later posts so that we may focus now on the essence of the page itself: the actual dollars and cents that all S&P 500 companies are reporting, in the aggregate, as the season unfolds. In order to do this MarketGrader adds up the daily value of all actual reported earnings per share plus the consensus estimates of all companies that have yet to report this season. And since companies are reporting on a daily basis, by combining actual reported values with estimates for upcoming results, MarketGrader has its fingers on the daily pulse of the earnings season. It can therefore track all changes to the overall dollar value of the S&P 500’s earnings as companies report results that are above or below their estimate. All EPS figures are, of course, added to the total on a market cap weighted basis to reflect the calculation methodology of the index itself. In the near future we’ll start reporting on the earnings season as measured by the reports of companies in our own indexes or the Barron’s 400.

As of last Friday, April 17th, 90 companies, or 18% of the S&P 500 had reported first quarter earnings. Companies that have beaten their estimate surpass those that have missed it by an almost 8-to-1 ratio, making the overall value of the index’s earnings rise accordingly. Including the earnings reported by these 90 companies and the estimates for the remaining 410 companies, the S&P 500 is on pace to report earnings of $16.20 in the first quarter of 2010. This value is already 6.6% higher than the $15.20 that index companies were expected to report a month ago, underscoring the strength of corporate earnings right out of the gate. It’s important to keep in mind, however, that companies tend to report in clusters largely based on their sector. For example, while 39.5% of all Consumer Discretionary companies have already reported, no companies in the Energy, Telecom or Utilities sectors have announced results.

Sector reporting patterns aside, were the season to end today with the current numbers, the $16.20 in earnings would represent the strongest earnings quarter for the S&P 500 since the second quarter of 2007 when it earned $16.91. It would also represent the strongest first quarter since Q1 2007, when it earned $16.72. It is therefore safe to assume that if earnings surprises continue at the current ratio of positive to negative reports S&P 500 companies are on track to surpass Q1 2007 as the best first quarter for corporate earnings in at least three years. It would also put the index on track for its best earnings report in any quarter in at least five years. Whether this is already baked into current stock prices is, however, a subject for another post. Stay tuned.

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