Third Quarter Earnings Derby: Stocks Still in the Game

Third quarter S&P 500 earnings results for the first three weeks of the season continue running far ahead of Street estimates. Importantly, however, recent weakness in some economic data has overshadowed the better-than-expected earnings and caused stock prices to fall sharply.

The pullback in stocks was largely erased Thursday as third quarter US GDP showed growth of 3.5%, the first positive economic growth in four quarters and also beating Wall Street estimates by nearly 10%. Even with some oil stocks reporting disappointing earnings, stocks soared by nearly 200 points on the Dow Jones Industrial Average.

The beat-rate for S&P 500 companies' earnings for the third quarter is running at a rate that I have never seen before. With 60% of companies reporting, 84% have reported earnings higher than Wall Street estimates, and 60% have reported better-than-expected sales. Here's a short breakdown of the results thus far for the S&P 500 companies:

Earnings Reported through Thursday

Positive Surprises: 258
Negative Surprises: 45
% Positive Surprises: 84%

The beat ratio of 84% so far this quarter is far higher than we expected, and we were as optimistic as anyone that earnings would again be better than Street estimates.

Revenues for Reporting Companies

Positive Surprises: 183
Negative Surprises: 118
% Positive Surprises: 60%

The common thread among the good earnings reports continues to be cost control.

Early this week, the markets appeared to begin looking past the good news on earnings, as some economic reports showed that the economy continues to struggle with housing and employment headwinds. The good news on US GDP growth for the third quarter, however, appears, at least for the moment, to have assuaged investors' concerns that the recent gains in the economy might stall out.

I'll update next week.

Data courtesy of Bloomberg

Comments

[David Van K...:]

Exactly right. The market, for several months now, has been almost totally driven by what I call "net news flow." There's no exact way to measure this, but the market has been reacting to economic data, survey statistics, company press releases, speeches by Bernanke et al, since March. During earnings season (right now), it has a slew of earnings reports to react to as an overlay on all the regular news, and people are looking for revenue and company-outlook information as well as for earnings.

Yesterday, obviously, the GDP announcement overwhelmed all the other news. The impact of this may last for a few more sessions, or it may not. It depends on what the news is. A "headline" disappointment by a bellwether company could turn it around fast. On the other hand, a steady flow of decent earnings & revenue news could keep it going. At any rate, this is anews-driven market.

Oct 30 08:19 AM

[jculley:]

Apparently it isn't lasting another session, the market is giving back all of yesterdays gains. This kind of reminds me of when the tech bubble popped, it seems very random when the market starts making these large daily swings. I didn't see any news to make the DJIA cratar 200 points a day after the GDP did better then expected.

Oct 30 12:34 PM

[Ricard:]

If I estimated that my dog would pee on my carpet three times a day, I'd be impressed if my carpet was not fully soaked and only scared away the Joneses and not my wife and kids.

Oct 30 03:40 PM

[Anthony Alfidi:]

How many of those positive earnings surprises were induced by the stimulus? Seeing lots of beats in absolute terms does not mean the economy is out of the woods.

Oct 31 11:22 AM