The Earnings Season: Better Than It Looks?

According to FactSet’s data, the earnings data so far is somewhat disappointing. As of the end of last week, with 21 percent of S&P 500 companies reporting, fewer companies were beating expectations for both revenues and earnings than has been normal. Earnings growth for the quarter is expected to be the lowest since the end of 2020, when the pandemic was really getting going and before the federal stimulus programs hit. Taking those headlines, things look pretty bad.

A Look at the Details

As usual, once you start looking into the details, things look considerably better. For earnings, for example, over the past 10 years, 72 percent of companies have beaten expectations. While the current figure of 68 percent is below that, it still means that more than two-thirds of companies are doing better than expected. Similarly, for revenues, over the past 5 years, 69 percent of companies beat estimates; this year, 65 percent of companies beat estimates, which is lower. But if you look at the past 10 years, the current number is above the 61 percent average for that time period. Either way, about two-thirds of companies are beating on both the top and bottom lines. Put that way, things look a lot better.

And that trend continues through to earnings growth. As of the start of the quarter, analysts expected earnings growth of around 4 percent. In the month since then, with a combination of positive earnings surprises and upward revisions to estimates, the expected blended growth rate is up to 4.8 percent. Much of the growth came from the health care and energy sectors, but earnings reports from this week suggest that other sectors are outperforming as well.

That said, of course, 4.8 percent doesn’t look that great either. But here, too, there are reasons to believe it is better than it seems. That 4.8 percent growth is over a difficult comparison—the second quarter of 2021, when earnings grew by 91.7 percent on the rebound from the pandemic and federal stimulus payments. With inflation and supply chain problems still choking companies, on top of the difficult year-on-year comparison, the fact that we are seeing growth at all is a positive indicator going forward.

Positive Surprises Ahead?

Even with those problems, 6 of 11 sectors are reporting earnings growth, led by energy and industrials. Other sectors showing revenue growth include materials and real estate. There are good news stories out there, despite the headlines. The worst impacted sector is financials, but here much of the damage is driven by loan loss reserves, rather than actual losses. Once you back those out, the numbers look considerably better—and offer the potential for more favorable surprises.

These surprises, based on history and the numbers so far, are what we should expect. That 4.8 percent growth number for the quarter assumes no more positive earnings surprises, which seems odd when we have already seen almost two-thirds of companies beat expectations so far. Given that, we should expect earnings at the end of the quarter to be even higher than expected right now. Indeed, historically earnings do end the quarter about 5 percent above initial analyst expectations. If that holds this time, when all the data is in, we should see growth of around 9 percent to 10 percent for the quarter, which would be much stronger than what is now expected. That level of end result would also be in line with the improvement seen so far this quarter. So, we can reasonably expect the final numbers to be better—perhaps much better—than the downbeat expectations at the start.

Not Great, But Good Enough

On a headline basis, the earnings numbers are not great but also not that bad. On a more detailed basis, they look even better than that, especially given the multiple headwinds in place. Overall, the news so far has been good, and we can reasonably expect continued improvement as more companies report. With valuations now at reasonable levels, given interest rates, that kind of steady improvement should help support the markets over the remainder of this earnings season. It’s not great news, perhaps, but so far at least more than good enough.