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EARNINGS SEASON is wrapping up on Wall Street. Analysts’ predictions and companies’ profit guidance is a bit of a dog-and-pony show, as HumbleDollar contributor Kyle Mcintosh recently described. Still, there’s some useful information to be gleaned from second-quarter results and from executives’ comments.
In particular, I look forward to the FactSet weekly earnings season update to see which pockets of the stock market have the best and worst figures. According to last Friday’s report, a whopping 87% of S&P 500 firms have reported better-than-expected earnings, versus an average beat rate of 75% for the past five years. For many decades now, public companies have endeavored to beat the consensus earnings estimate by a smidgen, sometimes just a penny. Company executives, along with many investors, see it as a win. It’s all part of the show.
What I find more telling is how stocks perform after companies report results. Intuitively, a stock should pop after a big positive earnings surprise, right? Bank of America tracks the share-price performance of companies reporting earnings relative to the S&P 500. During the current earnings season, firms that beat on both revenues and earnings outperformed the market by less than 1% the day after posting results. The historical average since 2000 is closer to 2%-plus. Much ado about very little? It seems that way to me.
Moral of the story: Don’t get caught up in the show. Financial television frames each earnings report as a make-or-break moment for the stock and the broader market. It isn’t. Maybe you’re like me and enjoy the spectacle. But in the end, never forget that earnings season comes, goes—and is quickly forgotten.
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It always amazed me how exited people get over earnings. Stock prize goes up with higher earnings, why? Because there is more potential I’m told. Why? Investors will pay more for a stock with growing earnings. Why?
Unless higher earnings are proportionately shared with shareholders it seems to me higher earnings, higher stock price is nothing more than playing at a casino. Nothing is real. That is especially true if higher EPS are the result of cost cutting or buybacks.
That’s excited, not exited