Earnings season is now almost over as 476 companies in the S&P 500 have reported, or 95.2% of the total. As in recent quarters, positive surprises dominate disappointments, currently by a ratio of 3.5:1, roughly inline with a week ago. The median surprise is a very health, though it had climbed for several weeks, has now stabilized at 3.45%, where it has been for the last two weeks. The median growth rate is far higher than was expected as we entered the earning season, currently standing at 13.5%, whereas high single-digit growth was expected.
The current reading is the same as last week, but well above what we were seeing early in the earnings season. It is now assured that we will have yet another quarter of double-digit median year-over-year growth (making it it 20 in a row) The good results have been very wide spread. In terms of growth, every sector but Telecom is showing near double-digit median year-over-year EPS growth. Every sector is showing more positive surprises than disappointments, and the worst showing is in Materials at two to one.
The leading sector for growth is Energy, with median growth of 20.4%, with all of the sector’s reports in. The sector also boasts the second the highest median surprise at 7.18%. Health Care is also having a very strong season with median growth of 16.7%, positive surprises out pacing disappointments by almost 4:1 with a median surprise of 4.07%. With all of the results in, the Industrial sector is enjoying a surprise ratio of over 8:1, a median surprise of 3.27%, and its median growth rate is a none-to-shabby 14.8%.
While no sector can truly be termed disappointing, the Telecom sector comes the closest. It is the only sector with negative median year-over-year EPS growth. But even there, positive surprises out number disappointments by 3:1. The Materials sector, has the lowest surprise ratio, at 2:1 and also the lowest median surprise at 1.15%, and the second lowest median year-over-year growth at 9.8%.
The Financial sector is showing median year-over-year EPS growth of 11.11%, a surprise ratio of almost 3:1 and a median surprise of 2.78%. However, given the recent turmoil in the credit markets one has to wonder if this isn’t the last hurrah of the sector. There is a minimum of $100 billion of losses related to bad residential mortgages out there, and most of those losses are probably going to be borne by the Financial sector.
That doesn’t count any losses from other types of paper, such as junk bonds and commercial mortgages. However, so far most of the bag holders have not been identified, though we do know that at least some of the losses have been shipped overseas. Banks in Germany and France have taken big hits, as have hedge funds in Australia. It was reported that a major bank in China holds almost $10 billion of subprime U.S. mortgage paper. There is a certain poetic justice in that, they send us toxic toothpaste, we sent them toxic tranches of mortgage paper.
There does seem to be a recurring theme in the earnings reports and it is that results from domestic operations are weak, while those from overseas are extremely strong. This is in keeping with the very strong worldwide economic growth coupled with anemic U.S. growth seen in the first quarter (although domestic growth does seem to be rebounding somewhat for the second quarter, but still lags that of the rest of the world).
Weakness in the dollar has also added to growth through currency translation. Historically such earnings boosts were seen to be as of low quality. However, if the dollar stays down, or continues to fall, they are very real earnings. Share repurchase is also playing a very significant role in EPS growth as a lower denominator can raise a number just as surely as a higher numerator can.
