Earnings? What Earnings?

By: Spencer Israel

This earnings season has been a steady parade of positive surprises.

Companies aren’t just beating the consensus earnings and sales estimates at a historic rate this earnings season — they’re also beating those estimates by a wider margin than average.

According to FactSet, 80% of S&P 500 companies to have reported Q4 earnings as of Feb. 12 had reported Earnings Per Share above the estimate. These earnings beats are also coming in an average of 15.1% above analyst estimates.

If those numbers were to hold, they would be higher than all but two quarters since FactSet began tracking earnings data in 2008. 

The sector with the greatest percentage of earnings and revenue beats is the Communications Services sector, of which 95% of companies have come in above estimates. This is followed by the Information Technology sector (91% of companies reporting beat the estimate) and Financial and Industrials (82% of companies beat). 

And yet, these strong fundamentals haven’t necessarily translated to stock performance. 

It started with the banks. Shares of JP Morgan, Goldman Sachs, and Morgan Stanely each fell approximately 10% in the week after their blowout reports, despite the fact that each bank reported EPS more than 40% above the estimate. 

The lack of enthusiasm spread to big tech as well. Apple fell 8% in the two days after its report, despite beating analyst estimates for EPS, revenue, and iPhone revenue. Facebook fell 6.6% in the two days after its better-than-expected report, while Amazon closed down 3% after reporting record revenues.

These examples do not represent the entire market, of course. There have been a number of stocks that have gotten post-earnings pops, including Twitter, Activision Blizzard, and PayPal. 

Experienced traders know that there are often more factors that can influence a stock’s post-earnings move than the numbers themselves. Pre-earnings sentiment, comments on the conference call and general market volatility can all override an otherwise stellar (or weak) earnings report. 

Even so, it’s telling that strong earnings results have in some cases seemingly resulted in opposite reactions this earnings season. This will be something to watch going forward, especially as economic activity begins to normalize back to pre-COVID levels. 

The author is long the S&P 500 in his retirement accounts.

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