The S&P 500 is trading at all-time highs.
And halfway through third quarter earnings reporting season, it looks like the underlying fundamentals — earnings per share — are set to post new records as well.
" At $26.85, 3Q 2013 EPS is on track to establish a new quarterly and trailing four-quarter high," says Goldman Sachs strategist Amanda Sneider. " Trailing four-quarter EPS totals $102.13. Despite more sales misses than usual, aggregate sales results are in line with expectations."
Sneider outlines the three biggest takeaways from Q3 earnings reporting so far in a note to clients: "(1) 3Q earnings positively surprise, driven by Financials and higher than expected margins; (2) Revenues have been in line with expectations and trailing four-quarter margins remain stable despite positive surprises in 3Q; (3) Negative revisions to 4Q EPS estimates."
Compustat, FirstCall, I/B/E/S, and GS Global Investment Research
"Despite negative 4Q revisions, the consensus full-year 2013 EPS estimate for the S&P 500 increased when combined with the positive surprise to 3Q estimates."—Amanda Sneider, Goldman Sachs
The chart at left shows that while consensus fourth-quarter estimates among Wall Street analysts are deteriorating as companies guide expectations downward, the upside surprise to third-quarter estimates so far more than makes up for worse Q4 numbers.
Despite the strong showing for Q3 earnings so far — and the fact full-year earnings are now expected to be better than previously thought as a result — guidance for Q4 earnings has not been pleasant.
"Company guidance has been more negative than usual with 42 of 51 companies (82%) guiding down 4Q expectations," says Sneider. "In a typical quarter, 70% of guidance is negative. Bottom up consensus estimates for next quarter fell 1% in recent weeks."
Compustat, FirstCall, I/B/E/S, and Goldman Sachs Global Investment Research
And cyclical sectors are taking the brunt of the damage — especially industrials and energy — as the table at right shows.
Meanwhile, in response to Q3 earnings, the market has been more likely to punish a stock that misses expectations than one that beats estimates.
" 59% of stocks that beat on earnings outperformed the market on the next trading day, while 70% of stocks that missed earnings underperformed," says Sneider.
And that first number has been coming down.
"The market has been less likely to reward sales and earnings beats in 2013 compared to 2011 and 2012," she writes. " Between 2011 and 2012, 62% of stocks that beat earnings estimates and 63% of stocks that beat sales estimates outperformed the market on the next trading day. This compares to 59% and 54% this quarter."
In the coming week, we should get a better look at how everything will eventually shake out.
"Next week is the last major earnings week of the 3Q 2013 season," Sneider says. " 27% of equity cap, 126 companies, is set to report. Half of Energy and Utilities market cap will announce results next week. 30% of the Health Care, Materials, and Info Tech sectors will also report."
In a separate note to clients, Goldman Sachs chief U.S. equity strategist David Kostin said the three questions dominating his discussions with clients about the stock market over the past week were " (1) the forward path of the US equity market; (2) prospective return of the S&P 500 compared with other global stock markets; and (3) investment strategies through year-end after a stellar 22% rally during the first 10 months of 2013."
On the first question, Kostin says the debate among Goldman clients can be characterized in three words: "Fama vs. Shiller" (the names of two economists who won this year's Nobel Prize in economics). Read more here »
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