UPDATING THE EARNINGS PICTURE

Another earnings season is just about in the books so let’s take a look at how things are shaping up.  As expected, it’s been another excellent earnings season.  With 90% of all companies reporting the results are shaping up to come in above our lofty expectations and are blowing the analyst’s expectations out of the water:

77% of all companies have beat expectations

Just 7% have reported in-line earnings

Just 16% of all reports have been below expectations

Revenues are growing 11.8% year over year

Revenues ex-financials are up 13.1% year over year

The headline figures look very strong so let’s dig a little deeper.   Revenues have been the key headline this quarter as we continue to see companies beating expectations due to cost cutting.  Unit labor costs were once again very low which shows a continued lack of hiring and cautiousness from most companies.  This has translated directly to the bottom line.

Revenues, however, have started to make a bit of a comeback, though probably not as strong as some would like to see by this point in the recovery.   Revenues per share for the S&P 500 are set to come in just 2% above last year’s figure.  This is the ultimate L-shaped recovery.  While operating EPS are set to climb 90% year over year revenues per share are nearly flat! It is important to note, however, that revenues did not rebound substantially during the 2003 recovery until well into the recovery.

The main driver of the rally over the last 18 months has been the fantastic ability of the analyst community (and investors in general) to underestimate the strength in corporate earnings.  As we’ve highlighted throughout the rally, this has been crystal clear in our Expectation Ratio which turned up just before the market bottomed (and earnings bottomed).  The trend over the last 18 months has been and continues to point higher.  We’ve seen a mild downturn in the last few quarters, but with the data still solidly positive we should continue to see strong earnings in the quarters ahead.

Overall, the strength of corporate earnings and the positioning of companies continues to point to an environment of outperformance.  Because Wall Street is an expectations game, and the oddsmakers – the analysts, are so impressively terrible at their jobs the market is likely to see continuing analyst upgrades, estimate upgrades, more chatter about “low valuations” and a general environment of underpromising and overdelivering.  This has been and remains the greatest hurdle for the bears to overcome.  The negativity and skepticism regarding corporate profits remains quite high and that means companies are likely to continue outperforming to the upside.  I don’t see this trend changing until the second half of the year at the earliest.