Company Reports Outshine Forecasts
A flurry of better-than-expected earnings, including head-turning results Thursday from Microsoft, ExxonMobil and 3M, have pushed earnings from the 277 companies in the Standard & Poor's 500 that have reported up 9.9 percent, Thomson Financial says.
Even if the rest of S&P 500 companies merely match expectations, growth for the quarter will settle at 7.1 percent. That would be a drastic improvement from 3.3 percent growth expected just two weeks ago and a big reason why the Dow Jones industrial average on Thursday closed at its 14th record this year, and the S&P 500 and Nasdaq composite are at their highest levels in more than six years.
"Earnings have been fantastic," says Ashwani Kaul of Reuters Estimates.
Getting less than 10 percent growth may seem like a letdown, since S&P says companies have posted 18 percent quarterly growth on average in the past five years. But investors are applauding the quarter's results, because they:
- Are much better than expected. Nearly 70 percent of companies have topped estimates, Kaul says, compared with the 60 percent that typically do. And companies have beaten estimates by a wide margin: 11.4 percent, Kaul says.
That partly reflects extreme pessimism by analysts and companies early this year, says Robert Maltbie of Singular Research. "The bar is so low, it's easy to beat," he says. Still, investors were skeptical until the numbers started flowing in. "You always wait for proof," he says.
- Include new industry participation. Companies that had been absent in the earnings boom, namely technology, are joining in, Kaul says. Tech has turned in 13 percent quarterly growth so far, making it the fastest-growing sector and topping the 9 percent growth expected when earnings season started.
- Reflect strong results from large companies. Big companies are finally contributing to the earnings growth picture, says Dirk Van Dijk of Zacks Investment Research. So far, large companies are reporting 57 percent greater growth than small companies, he says. They're scoring from strong demand from foreign markets, something smaller companies are missing out on, Van Dijk says.
The remaining question, though, is whether earnings estimates are also overly pessimistic for the rest of the year. Earnings are expected to bottom out with 2.3 percent growth in the third quarter and rise just 7.3 percent this year, S&P says.
If better-than-expected earnings remain a big driver behind the resurgent stock market, and those forecasts do prove too low, it could mean even more good times ahead for investors. "Could companies underpromise and overdeliver? It's very possible," Van Dijk says.
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