10 Shocking Earnings Season Trends (Part I)

Includes: EXT, SPY
by: Lou Basenese

While most investors continue to track every jot and tittle of the market to see if we hit yet another record high, a more important situation is still unfolding. What could that possibly be? Oh, just a little something called earnings!

Remember, stock prices ultimately follow earnings, and we're still in the midst of the first-quarter earnings reporting season. Most analysts predicted that results would be terrible this go-round. On average, they expected S&P 500 companies to report a 0.7% contraction in profits. With roughly 80% of companies' reports on the books, though, S&P 500 earnings actually grew by 3.2% in the first quarter. The strength is broad based, too, as nine out of 10 sectors have reported stronger earnings relative to last year.

Talk about a swing and a miss by analysts! What an embarrassment. However, there are several surprises contained within the reports. Take note and invest accordingly…

Surprise #1: A Bullish Earnings "Beat Rate"

A month ago, I told you to focus on the earnings "beat rate" (i.e. – the percentage of companies that reported better-than-expected earnings). As I said at the time, "Any reading above 58.7%, which is the low since this bull market began, should pave the way for higher stock prices."

Well, 59% of companies have beaten earnings expectations, according to Bespoke Investment Group. If we focus on just S&P 500 companies, that number rises to 72%, which tops the average beat rate for the past four quarters of 70%. In the end, the current beat rate might not be overly bullish. But any bullish reading still points to higher stock prices. I'm not the only one embracing this optimistic outlook, either.

On Monday, Berkshire Hathaway's (NYSE:BRK.A) Warren Buffett and Microsoft's (NASDAQ:MSFT) Bill Gates took to the airwaves of CNBC, declaring that stocks are a better bargain than bonds now.

Surprise #2: So Much for the Weak Consumer

Tall tales abound about how American consumers are still cutting back on spending. But they're not. At least, not nearly as much as analysts expected. Case in point: The consumer discretionary sector boasts the best earnings beat rate this quarter, at 64.3%.

Financial stocks represent another surprising bastion of strength, with 60.4% of companies reporting better-than-expected earnings. (More on that in a moment.)

Surprise #3: Reversal of Tech Fortunes

As I mentioned before, nine out of 10 sectors in the S&P 500 have reported stronger earnings compared to last year. Of course, that now begs the question: Which sector is the lone laggard? Believe it or not, it's technology. The sector has the lowest earnings growth rate so far of -3%. If that wasn't shocking enough, Apple (NASDAQ:AAPL) is weighing the sector down the most, with an 18% earnings slide, while former laggard, Microsoft, is propping the sector up with a 20% profit jump. Talk about a reversal of tech fortunes!

Add it all up, and the tech sector weakness means that we need to be pickier when choosing investments in the space. Speaking of which, I'll be sharing a handful of top tech investment opportunities with readers of Tech & Innovation Daily this week.

Surprise #4: Bank on Banking

Back in March, I wrote: "The banks got us into the financial crisis. So it stands to reason that they need to lead us out, too. That recovery is undeniably underway." Fast forward to today, and forget simply "underway." The recovery is now gaining steam. Case in point: The crown for the highest earnings growth rate this quarter belongs to the financial sector. On average, financial companies grew earnings by 11.5%. That's more than triple the market average.

No surprise, the biggest contributor to the earnings growth is Bank of America (BAC). Even if we remove it from the results, though, the financial sector would still be in the top three – with an earnings growth rate of 7.4%, according to FactSet. On the heels of such strength, we should keep banking on bank stocks.

Surprise #5: A Little Help From Housing

I'm a broken record when it comes to the residential real estate recovery. So I figured you'd enjoy hearing different "artists" singing the same "tune." Straight from the earnings reports (emphasis mine)…

  • E. I. du Pont de Nemours and Company (NYSE:DD): "Operating earnings and margins are expected to improve sequentially from the first quarter to the rest of the year due to our productivity actions, the U.S. housing market rebound, and improving demand in industrial and public sector markets."
  • United Technologies Corp. (NYSE:UTX): "The housing and commercial construction markets are improving, Americans are investing in their homes again, and our North American Residential HVAC orders were up 11% versus last year."

Clearly, the housing recovery is gaining momentum. What's more, it's not isolated to the most obvious beneficiaries (i.e. – homebuilders). It's spreading to multiple industries, which means it's high time to load up on overlooked real estate-related investments.

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Tagged: Earnings
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