Results haven't done much to prop up the overall market, but
analysts said that the numbers should relieve worries that last
year's big rally came without much gain in profit growth.
Investors turned their focus in recent weeks to volatile emerging
markets and less stimulus from the Federal Reserve. At the same
time, fourth-quarter earnings growth has clocked in at 9.5 percent
above year-ago results, better than the 7.6 percent expected when
the period began.
Notably, companies that surprised investors with
better-than-expected results in terms of both revenue and profits
reaped a reward: Their stock prices jumped.
On average, those that beat on both metrics are up 2.1 percent in
the five days that followed their results, according to Bank of
America Merrill Lynch research, while those that missed on both are
down 5.6 percent in that time. That gulf is the biggest seen since
the fourth quarter of 2008.
Consumer discretionary stocks had the biggest gap between the
gainers like Netflix Inc <NFLX.O>, which rose 20 percent in the five
days following its results, and losers like Amazon.com Inc <AMZN.O>,
which fell 12 percent in a similar period.
In all, 68 percent of S&P 500 companies' results are beating
analysts' expectations on earnings, above the 63 percent long-term
average, while 66 percent are exceeding forecasts on revenue, which
would be the best "beat rate" since the second quarter of 2011,
Thomson Reuters data showed.
"The percentage of companies beating on EPS, on sales and on EPS and
sales — all of those metrics — are above average. That's a pretty
positive sign," said Dan Suzuki, U.S. equity strategist at Bank of
America Merrill Lynch in New York.
If the pattern of big swings for consumer discretionary companies'
stocks holds, it implies more volatility for those that have not yet
reported, including Kohl's Corp <KSS.N>, Gap Inc <GPS.N> and Lowe's
Companies, Inc <LOW.N>, as well as other retailers that struggled
through the most competitive holiday shopping season for the U.S.
industry since the recession.
SOLID RESULTS, EVEN IF OVERLOOKED
With results in from about 70 percent of S&P 500 companies, the
group is on track for the best earnings growth since the third
quarter of 2011, Thomson Reuters data showed.
Revenue growth at 1.1 percent is still expected to lag the third
quarter, but the percentage of companies beating analysts' forecasts
is the best in more than two years.
Those are sound results for a stock market that has been turbulent
this year, with the Standard & Poor's 500 index <.SPX> posting a 3.6
percent loss in January and slipping 1.6 percent so far in 2014.
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That downturn follows the S&P 500's 30 percent gain last year, when
earnings rose just 6.1 percent. Valuations increased sharply because
of the price gains, with the S&P 500's forward four-quarter
price-to-earnings ratio now at 15.1, compared with 13.1 at the start
of 2013, according to Thomson Reuters data.
"A lot of people have begun to wonder about the sustainability of
the rally because it was driven so much by multiple expansion rather
than earnings, and that's entirely accurate," said Dan Greenhaus,
chief strategist at BTIG LLC in New York.
But "earnings are going up — earnings are accelerating," he said.
Many investors were expecting profit growth to pick up in 2014,
thanks to a more robust U.S. economy, with double-digit earnings
growth projected for the third and fourth quarters.
On some levels, earnings have done well once again by exceeding
expectations. Outlooks for the fourth quarter were the most negative
of any period since at least 1996, when Thomson Reuters began
tracking this data.
The earnings season, to some degree, has been overshadowed by the
rout in emerging markets, which prompted a selloff in stocks in the
United States and other developed economies.
Financials have had the most positive earnings surprises, with
results from insurers like the Travelers Companies, Inc <TRV.N> and
Allstate Corp <ALL.N> among those in that sector that have beaten
expectations by the biggest margins.
Not everything is picking up.
Outlooks for the first quarter remain largely negative, with 4.8
companies warning for every one with a positive forecast, Thomson
Reuters data showed.
Earnings estimates for all of 2014 have slipped, with growth now
predicted at 9.3 percent versus a January 1 forecast of 10.8
(Editing by Jan Paschal)
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