Tim Hoyle, CFA, Chief Investment Officer
thoyle@haverfordquality.com
So Far So Good as We Enter Week Three of Earnings Season
Just as the market has become more concentrated in a few big names, the earnings calendar has too become concentrated on this the third week of companies reporting quarterly results. It is anticipated that 190 S&P 500 constituents, representing $16 trillion of market value, will provide a quarterly update this week.
Source: Haverford Trust and FactSet Research Systems
Selected S&P 500 Companies Reporting this Week
Source: Haverford Trust and FactSet Research Systems
Up to this point, with over 100 companies reporting, we can characterize the reports as “so far so good.” Of course, there have been negative outliers, such as European tech giant SAP (not an S&P constituent), but overall, 84% of S&P 500 companies have reported a positive EPS surprise, and 81% have reported a positive revenue surprise. If 84% is the final percentage, it will tie the mark for the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008.
The strong start to earnings season has raised the bar for this quarter’s earnings estimates. As of September 30th, consensus believed earnings were set to decline 21% year-over-year, which has improved to -16.5% as of October 23rd. It is hard to believe that despite a 16% decline in comparable earnings, the S&P 500 is up 12% over the same time period. The reasons for the market’s advance have been well documented on these pages and include massive fiscal stimulus, vaccine optimism, and TINA (there is no alternative to owning stocks in the low rate environment).
Leaving 2020 behind, the S&P 500 now trades at 21 times expected earnings over the next 12 months. At this level, which is well above the 20-year average of ~16 times, companies can’t afford to disappoint investor expectations, as SAP’s disappointing results demonstrated.
