Earnings Trends: 8.0% Growth Hardly A Disaster

We are rapidly approaching half-time for the fourth-quarter earnings season. So far 215, or 43%, of the S&P 500 firms have reported and four sectors have passed the halfway point.

On a median year-over-year EPS growth basis, so far things haven’t been all that bad, especially for non-financial firms, although clearly there have been some challenges among the cyclical Materials and Consumer Discretionary firms. Yes, the results, even on a median growth basis, are weaker than we have become accustomed to seeing, but 8.0% growth is hardly a disaster.

Similarly on the surprise front, things overall are weaker than in recent quarters, but not the end of the world. The ratio of positive surprises to disappointments is currently running at 2.24, so clearly there are far more better-than-expected results than disappointments. On the other hand, a ratio of better than 3:1 has been regularly achieved over the past several years.

The median surprise which normally runs well above 3.0%, is at a somewhat subpar 2.3%. However, eliminate the financials (good idea for your portfolio too!) and the median surprise rises to 3.33% and the surprise ratio rises to 4.27. The median year-over-year EPS growth climbs to a very "normal" looking 12.5%.

There are five sectors where positive surprises are outnumbering disappointments by more than 5:1, and only financials has more disappointments than positive surprises. However, given the lopsided margins of positive surprises, the median surprises are not very impressive. For example, in the Industrials, there are 22 stocks that came in ahead of expectations versus just a single disappointment (Paccar (PACR)), yet the median surprise is just 2.44%. This suggests that most firms are just beating the numbers by a penny or so.

(Note that the growth rates presented refer only to those firms that have already reported, not to the entire S&P 500 or the full sectors.)

Turning now to total net income growth, the picture gets uglier. The total earnings for the firms that have reported so far are 37% below the total earnings of a year ago.

As with the median numbers most of the blame can be laid at the feet of the Financial sector. Fortunately more than half the Financial firms have reported. Among those that have, the total loss so far is more than $8.9 Billion, versus income of $42.6 a year ago. It is interesting to note that the same number of Financial firms (13) have gone all the way from profit to loss as the number that have reported any positive earnings growth at all.

On the other hand, there are several sectors that are reporting simply spectacular results. In fact, if Financials are excluded, then total net income is up 15.1% over a year ago ($79.1 billion versus. $68.7 billion).

Telecom’s 45.6% gain is somewhat artificial since it reflects the effects of the AT&T/Bell South (T) merger and it is a tiny sector in terms of total number of firms (nine, of which only two have reported so far).

Utilities seem to be having a good quarter so far on both the median and total net income fronts, but they are normally late reporters and it is still very much early days for them with only 16% of the results in so far.

The real star of the show so far is the Tech sector, with 57% of the reports in, total net income is up 31%. Note that is also doing very well on the median growth and surprise fronts.

It is also still early for the Energy sector, with just over of the votes in, but so far so good, particularly when it comes to total net income growth at 20.2%, and virtually identical to its median growth rate. However, it is a laggard on the surprise front with positive surprises leading disappointments by only 5:4.