EARNINGS UPDATE
Nearly 40% of the S&P 500 has reported earnings so far so let’s take a few minutes to see how things are shaping up. On the bright side, earnings are 15% ahead of estimates so far. On the dark side, earnings are still down 30% from last year. With the exception of MS, financials are coming in well ahead of expectations (this is skewing the data enormously). We also have to keep in mind that GS pulled a fast one on us and conveniently excluded their $2.15 loss from December. Health care remains the strongest sector in terms of earnings and is actually seeing a positive 7.7% gain year over year.
We’ve seen a dramatic improvement in the expectation ratio in the last 2 weeks. Take the most recent improvement with a grain of salt – much of it is due to the fact that the analysts never fully adjusted their estimates for the dramatic accounting changes. Nonetheless, this is a long-term positive sign for the markets and a clear signal that analyst’s expectations are coming more and more in-line with reality. Analysts are still calling for $60 in EPS this year which I believe is a long shot. I think we’re more likely to see something in the $45-$50 range so estimates have substantial room to drop. So far, this year is playing out how I expected. If I were to see a major reduction in earnings estimates heading into Q3 (something I do expect) I would likely become a raging bull (especially if we got a market meltdown to coincide). For now, I still think the risks remain to the downside because the majority of investors are far too bullish about a second half recovery and a bank solution, but we’ll try to adapt to the environment as things progress. Lord knows I’ve been wrong before, but my track record during this bear market has been pretty good. Stay tuned.
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The pattern I have seen is beating on EPS and missing on revenue. That would suggest to me that companies have been very aggressive in cutting costs.
100% correct. I would also add that EPS can be manipulated while revenue can't. Revenue is the MUCH better indicator of how things are going…..
As you said the shady bank earnings this quarter really have to be adjusted to reality to get the true picture of this quarter. And I still can't believe that the low level of expectations is supporting this level on the market. All it takes is for things not to still be in a complete plunge or similar things and the market's fine by that. Earnings are terrible. If the market was in the 600s then I could understand the lack of downside reaction. But up here at 850ish I just don't understand.
The only explanation is the mass denial that's still out there. That and the continued tendency to look at how far off the highs we are and think that that justifies current prices, without looking at basic fundamentals going forward. The same thing is happening in the housing market and people will regret buying in too soon.
Let the stress test's pass and sink in and then let the Q2 and Q3 downgrades pile i over the slow summer months. We could easily revisit 666 before October.
TPC has been right so far, and hes been patient. I bought some SDS at the 875 level last week but that was just dipping in the water as I still have some ammo saved for after the stress test. This market is still holding up very well in the face of bad news today…UPS saying 2010 for a recovery, march existing home sales and revised down feb numbers and Bernanke, Paulson forcing BoA to do the Merrill deal.
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