Six Striking Trends Emerge from Third Quarter Earnings

With only few companies left to report earnings for the third quarter, some striking trends are apparent in the data.

1. For four consecutive weeks the percent of positive surprises has held steady at between 80% and 85%. This is the highest quarterly earnings-beat rate that I have ever seen and shows that US businesses are right-sizing their cost structures in a remarkable fashion. Alan Greenspan used to speak glowingly about the flexibility of American business management. This right-sizing of costs is vivid proof of just how flexible the average company in this country is.
2. While the average earnings for all reporting companies are 15% lower than the third quarter of 2008, the results are better than the -20% estimate at the beginning of the earnings season.
3. The positive average surprise has been nearly 15%, again an extremely high figure and higher than last quarter's surprise rate.
4. Overall corporate sales are down approximately 12% from a year ago, right on Wall Street estimates. Wall Street analysts, however, are now estimating that both earnings and sales will be higher, on a year over year basis, for the fourth quarter of 2009.
5. Larger companies are reporting better earnings than smaller companies.
6. Multi-national companies are reporting better earnings than domestic companies, as a result of their greater global sales, as well as the falling dollar.

Revenues and earnings for major US companies are estimated to be higher in 2010 than in 2009. The coming year will likely be the first up year for earnings since 2007.

In the face of this "on balance" good news, the path of least resistance for stocks is up. The ferocious roars of the bears is increasingly sounding like the wailing of ghosts of nightmares past.

Comments

[whydtinogo:]

1. I would argue that earnings beating estimates has very little to do with right sizing cost structures and more to do with beating regulalry reduced estimates.
2. As the second quarter earnings season ended, third quarter earnings were expected to decline by around 12.5% (Zacks median growth estimates for the SPX).
3. The average beat masks the skew in the numbers - strip out the financilas things were not so good.
4. If the numbers quoted are accurate, sales declined by less than earnings yet we are led to believe that cost structures are being right sized.
5. Small cap companies continue to out perform large caps - go figure.
6. I don't disagree.

While "the ferocious roars of the bears is increasingly sounding like the wailing of ghosts of nightmares past" may well be true, desperately seeking "fundamental" justification in a liquidity fuelled rally is bordering on pathetic.

Nov 10 07:45 AM

[David Van K...:]

Assuming the facts are basically correct as stated (I have not checked them), the article is spot-on. I have been stating for months that this rally has been and is based on "net news flow." That is a pretty subjective standard, but it is what is driving the market. The most important news items, IMO, are earnings news, revenue news, and general economic news.

On any given day, a single headline news item can seem to drive the market (up or down), while on other days it seems like it's a blend of smaller news items from the past couple of days. Occasionally, the market seems to move counter to the balance of that day's news, but on most days, it reacts about as you would expect.

This article mostly covers earnings news. The "news" in earnings is almost always results vs. consensus estimates, NOT results vs. year-ago or last quarter. It's been that way as long as I can remember, this current rally is not unusual in that regard. That's why companies work so hard to manage expectations...it's a routine function at most of the largest and best companies. It's all part of capitalism.

Nov 10 08:25 AM

[Brandon2009:]

HA HA....the numbers are good because BS estimates were beat. What a fu*k*ng joke!

Nov 10 09:20 AM

[jeffz:]

"The ferocious roars of the bears is increasingly sounding like the wailing of ghosts of nightmares past."

This is exactly the time the tops are formed..

Nov 10 12:01 PM

[user396040:]

The article makes some very good points. It looks like companies and analysts have been gaming the system a little by low balling earning estimates so as to create positive "surprises" rather than negative disappointments. This is understandable but after a while will be discounted by the market. This should probably be taken into account when assessing estimated future earnings

Nov 10 04:23 PM

[richjoy403:]

The author is correct in all his 6 points. Stocks will continue advancing so long as investors believe companies will SOON have advancing revenues on an annual basis (i.e.; 4th qtr. '09 vs same in '08). Some very easy comparisons are coming up, and if we fail this test...look out below!

As for myself, I tend toward the positive (with stop limits if wrong, this has worked extremely well for the last 4,000 Dow points). However, I do not look for a melt-up, as we still have serious concerns in housing, employment, and bad loans to resolve (all lagging indicators).

Nov 19 06:42 AM