Anyone who watches the stock market is familiar with the game that's played in board rooms across America. Companies initially set lofty earnings expectations then gradually lower estimates throughout the year only to beat those hatcheted estimates upon reporting financial results. Wall Street cheers the beat and the stock heads higher.
It's an age-old (read: perverse?) tradition. But it's not happening this year. Why? Corporate America is actually beating earnings. And not bombed-out manufactured earnings beats either. For the second quarter in a row, the average of earnings per share revisions within the S&P 500 have been 0% versus nine consecutive quarters of negative revisions for S&P 500 companies.
All of this means: As the U.S. economy continues to accelerate, management teams are outright beating the earnings guidance they set out at the outset.
Let's back up. We're now three-quarters of the way through first quarter earnings season. So far, about 75% of S&P 500 companies have reported aggregate sales and earnings growth of +8.2% and +15% year-over-year. That's pretty good considering prior to the earnings growth reported in the fourth quarter of 2016, the U.S. had five straight quarters of falling declining year-over-year earnings. That's an earnings recession.
From Earnings Recession to Earnings Acceleration...
We've come a long way since then. Here's a more detailed breakdown of the financial results reported this earnings season from Hedgeye U.S. Macro analyst Christian Drake in this morning's Early Look along with our Chart of the Day:
- Growth: Earnings growth in all three of the major U.S. benchmark indices (S&P 500, Russell 2000, Nasdaq) is up at least 15% year-over-year, marking the best rate-of-change figures since 2011
- Beat %: Across the S&P 500, the magnitude of earnings surprises is at its widest since the first quarter of 2015 as is the percentage of companies beating topline estimates.
- Operating Momentum: 60% of companies have reported a sequential acceleration in sales growth, a multi-year high.
So sales and profit growth are accelerating. We expect this trend to continue as the U.S. economy continues to heat up through the end of 2017.
