EARNINGS UPDATE
90% of the S&P 500 has reported Q1 earnings and the numbers are ugly, though improved from Q4. Health care is the clear winner this earnings season and remains the only industry in which I am seeing any sort of real strength. The industry now represent 26% of total earnings. Financials were the big winner in terms of share price movements this earnings season as estimates came in far above estimates. The quality of the earnings are terrible and I attribute the better than expected figures to a lack of analyst response to the changing environment as opposed to actual improvement in earnings. Analysts failed to respond to the AIG revenue boosts and the M2M change almost entirely. As reported earnings will be about 50% below last year. As reported earnings are set to come in at a $-1.83 year over year – the first time the index has ever reported a 12 month negative print.
My proprietary expectation ratio is at its highest level in over a year. This is a clear sign that estimates are coming in-line with actual earnings. This is an enormous positive for the markets going forward.
Earnings can be cooked in the short term, but in the long haul it's another story. Funny how lot of companies came in just barely ahead in earnings and/or revenue. NEVER just barely behind. Strange..
The revenues are where the real information is. I have never seen so many companies miss revenues and beat on the bottom line. In other words, the job cuts and cost cuts are kicking in, boosting margins and making profits look strong. That's not organic growth and I am very doubtful that revenues will spring back in the coming year. You can screw around with the bottom line, but you can't screw around with the top line. As of now, we're seeing a lot of false net income. Cost cuts are not sustainable. At some point companies will need to begin growing their revenues again.