With positive U.S. economic data hitting the wire on an almost daily basis, we thought this would be a good time to gauge the state of corporate earnings for U.S. companies and look ahead to how improved economic reports might be impacting analysts' estimates. More specifically, we'll look at expectations for the current quarter and for fiscal year 2012 in the context of the earnings season just ended and the trend of corporate earnings in the last year. As companies get ready to close the current quarter, investors begin to anticipate the upcoming season and the impact it will have on full year earnings, ultimately the biggest driver of stock prices; in this context, it is MarketGrader.com's goal to serve as a guide during upcoming earnings seasons to help investors follow specific sectors, industries and stocks that might be affected by changing expectations. MarketGrader.com's analysis of corporate earnings, tallied in our "Earnings Season Report Cards," is based on a bottom-up approach by which we measure reported and diluted earnings per share and aggregate the values across our broad coverage universe as well as for broad market indexes, particularly the S&P 500 and the equally-weighted Barron's 400. By tracking on a daily basis earnings reports relative to analysts' expectations we are able to maintain a running total of quarterly and annual earnings that help investors understand whether companies are collectively reporting ahead or below expectations and what sectors and specific stocks are contributing the most to the upside and downside. This particular report will focus on corporate earnings for the S&P 500.
By MarketGrader.com's account, earnings for the S&P 500 were virtually flat relative to the fourth quarter of 2010. With 475 of the 500 companies (or 95%) reported to date, index components are on pace to report $21.33 in fully diluted earnings per share in Q4 2011, putting it 0.5% below the $21.43 earned in the equivalent quarter a year earlier. Sequentially, when comparing the results against Q3 2011 earnings per share of $22.32, the drop was 4.4%. It's important to note that MarketGrader.com's tally of fully diluted EPS is lower than the tally of EPS as reported by the companies since the share base across most companies based on full dilution is larger than the number of shares used to calculate reported EPS. The trend of companies beating their consensus estimate last quarter was also negative compared to the third quarter, with 59% of all companies surpassing analysts' expectations compared to 69% during the previous earnings season. While the number of companies that met estimates remained unchanged at 11%, the deficit in positive earnings surprises showed up in the earnings miss category, with 30% of companies failing to live up to their consensus estimate vs. 20% in the prior period. Despite a flat fourth quarter, S&P 500 companies reported a healthy 11.8% increase in diluted earnings per share for all of 2011 to $87.48 compared to $78.25 earned in 2010. Such increase is what has kept stock valuations within reason despite a gain of over 20% since early October in the main market benchmarks, along with rising estimates for the quarters ahead, which make forward P/Es appear relatively benign.
On a sector-by-sector basis, Consumer Discretionary was the big winner of 2011's fourth quarter, with diluted EPS up 78% in the aggregate compared to the comparable period in 2010. It was followed by modest gains of 8% for financials, 6% for Industrials and 4% for Technology. The quarter's biggest laggard was Materials, with diluted EPS coming in 71% lower than the Q4 2010 reports. Nominally, Telecommunications companies fell in the aggregate by more than 100% but this is simply an arithmetic quirk as the group as a whole reported negative diluted EPS. The two other sectors that reported earnings below the year earlier period were Consumer Staples, down 31% and Utilities, down 15%. Health Care was essentially flat with a 1% gain.
Some notable names that were upgraded by MarketGrader.com following their earnings report were Yahoo (YHOO) - Hold, Ford (NYSE:F) - Buy, Humana (NYSE:HUM) - Buy, American International Group (NYSE:AIG) - Hold and Paccar (NASDAQ:PACR) - Buy. Notable downgrades included Chevron (NYSE:CVX) - Sell, First Solar (NASDAQ:FSLR) - Sell, Alpha Natural Resources (ANR) - Sell, Newmont Mining (NYSE:NEM) - Sell and Hewlett-Packard (NYSE:HPQ) - Sell. For the complete list please visit our Earnings Season Report Card.
In contrast to last quarter's flat earnings, analysts continue to sound bullish about earnings prospects for the S&P 500 both in the first quarter of 2012 and for the full fiscal year. Consensus estimates show the index earning $23.63 per fully diluted share this quarter, an increase of 11% from 2011's first quarter. Full year 2012 earnings expectations are even rosier, with analysts polled by FactSet Research expecting aggregate S&P 500 diluted EPS of $103.99, up 19% from the $87.48 earned in 2011. On a quarter-by-quarter basis, S&P 500 companies are expected to report diluted EPS gains of 15% in the second quarter, 20% in the third quarter and 30% in the year's last quarter. All else being equal, if analysts' forecasts materialize into actual reported earnings for S&P 500 companies, the index would need to climb an additional 19% from current levels to 1,643 to maintain the exact same trailing P/E of 15.8 it sports today (based on fully diluted earnings.) With European sovereign yields for peripheral countries still dangerously high, the potential for U.S. rates to start climbing sooner than the Fed anticipates and what promises to be a highly contested November election, equity investors would no doubt sign off on such a bet today with over three quarters of the year still left. While we can't predict the future, we do look forward to tracking and reporting the results in quarters to come.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.