Earnings Delivering So Far

The market had a nice run-up ahead of earnings season and was driven by some preliminary positive responses (GS and INTC come to mind, followed not long afterwards by CAT).

Below we have extracted a chart from a premium bulletin sent out several days ago. By slicing the earnings reports and summarizing them we can get a better picture of the broad success large cap stocks have posted this quarter. The red line highlights the ratio of companies that beat their earnings estimate versus those that missed (companies reporting in-line are excluded). At 5.35 this ratio is the highest since the second quarter of 2004.

Perhaps more importantly however is the series shown by the blue bars. These bars represent the average difference between reported and estimated EPS. In other words, on 7/14 Goldman Sachs reported earnings of $4.93/share versus an estimate of $3.65 (the difference is $1.28). The arithmetic mean of those differences stood at $0.06 as of 7/27.

So what does this mean? Analysts were too bearish heading into earnings and when their estimates were blown away, the market rallied as a result.

click to enlarge

Comments

[TCK:]

The majority of earnings announcements this quarter have featured better than expected results due to cost cutting. The other disclaimer has been, "excluding one time charges".

I don't think any of this signals the start of a recovery.

Jul 31 08:46 AM