EARNINGS CONTINUE TO OUTPERFORM

We’re about halfway through earnings season and the stronger than expected earnings have gone largely overlooked as politics has dominated the investment landscape in the first few weeks of the year.  Nonetheless, the figures have been very good and we maintain our view that we are unlikely to see a sustained downturn due to the very strong underlying earnings picture and the continuing low expectations going forward.  As we mentioned before earnings season began, this was likely to be another very robust earnings season compared to expectations.  To our amazement, it is actually surprising to the upside of our lofty expectations.

Thus far, 75% of companies have outperformed bottom-line expectations with 65% of all companies also outperforming on the top-line.   Just 15% of all firms are reporting earnings below expectations.   Guidance has also been strong as analysts continue to underestimate the future growth of earnings.  Thus far, 13% of companies have increased guidance while just 2% have reduced their guidance.

A look under the hood shows a continuing problem, however.  Revenues are still not showing signs of strong organic growth.  The “backwards check mark” in earnings is still very much alive.  Year over year revenue growth is just 1% ex-financials.   Fortunately for corporations the cost cuts continue to drop down to the bottom-line.   As we previously discussed, margins are nearing record highs again:

The overall strength of corporate income statements continues to be underestimated by investors as our expectation ratio surged near its recent highs.  The indicator is showing broad strength in all facets of corporate income statements when compared to analyst expectations.  This should continue to put a floor under equity prices as we believe it will lead to future upgrades and price target increases.  Despite popular belief that this is the beginning of another major market downturn, the earnings picture tells a different story.