Earnings Season Getting Underway

Earnings reports are coming in.  As usual, companies are exceeding analyst forecasts.  This has now been the pattern for several years.  It is not surprising, since the economy has been strong, corporations got lean and mean, and balance sheets have improved.

There is absolutely no sign that earnings estimates are inflated.  Companies seem cautious in their outlook, as they have been for several years now.  Wall Street pundits think that this means weakness, since the young money managers are all schooled in what happened in 2000.  They are fighting the Last War.

Take a look at the conclusion from The Big Picture and also take a good look at the chart.  Read the Barry Ritholtz analysis, and then come back for our take.

Link: Earnings Season Getting Underway.

Earnings season gets under way this week, and so far we’ve seen less earnings beats than in prior quarters since the 2003 lows. With just 11% of SP 500 companies reporting, 62% have beaten estimates, while 19%have missed estimates. Analysts have been …

The chart covers only the period of double-digit earnings growth.  During this time stock prices have dramatically lagged the fundamental increase in earnings while interest rates were low.

Barry writes as follows that  "Analysts have been overly optimistic compared to past quarters."  Wow!  Earnings are beating estimates by 62%.  The chart shows only the time period in which the earnings growth has been in a record-breaking string of double-digit gains.

A student in a journalism class might write that analysts were a bit more pessimistic this season than they were in prior quarters (and therefore closer to reality), but that pessimism was still the order of the day.

Why not just report data objectively?  Why not look at a long-term history of earnings results versus expectations, rather than chopping off a chart that shows only the historic gains of the last few years?

And how does 62% beats versus 19% misses indicate something wrong with earnings growth?

You may also like


  • Barry Ritholtz January 23, 2007  

    We are looking to identify when there is a change in performance relative to expectations. The raw numbers do not matter, but rather, the change is what is significant.
    To investors, the question that matters is this: “Are more companies beating than in the past, or are less?”

  • Bill aka NO DooDahs! January 23, 2007  

    To some analysts, the only question that matters is “how can I spin this data bearishly?”

  • Paul Meisel January 24, 2007  

    There is a lot more heat than light in earnings season commentary. It reminds me of my wife and daughter watching E! — there may be nothing to talk about but we have to talk anyway…………

  • Bill aka NO DooDahs! January 25, 2007  

    How about this: who really gives a darn about how the companies in the mutual fund known as the S&P 500 do during earnings season? Why does it matter about the implications for “the economy” – which, for the benefit of those with an economist’s miseducation, is not the same as the G-D-P.
    What really matters is that over the course of the next several weeks, most of the publicly traded U.S. stocks will report earnings, and earnings are often a catalyst for growth in share price. The propeller-heads write papers about “inefficient transmission of information” or “earnings underreaction” but some traders know that earnings season is to be looked forward to as a huge buffet at a new Chinese restaurant should be – sure, some of the dishes will taste bad, if you sample small portions, you’ll adequately control your risk.
    Embrace earnings season!