Earnings season isn't quite over yet – it started back at the beginning of April, and has another week or so to run. But we're about three-quarters of the way through the companies that will be reporting earnings, and what we've learned so far can tell us a fair amount about the state of the current market. In a nutshell, companies are beating their earnings at a tremendous pace, but it has had little effect on the wider market.
Why is that? Primarily, it's because it's not longer news to say that most stocks have beat their earnings estimates as forecast by Wall Street analysts. The majority of stocks always beat their estimates: historically, around 62 percent of all reporting companies exceed Wall Street's numbers. This season, though, that number has been running closer to 75 percent, as of the beginning of this week. Stocks have been beating their estimates by an average margin of 7 percent.
But that doesn't necessarily translate into a hotter stock market. Remember, the majority of the market's gains on the year happened early on; since April 1st, when the current earnings reporting began, the S&P 500 is actually down by about 2 percent.
The fact is, beating earnings estimates has already been priced into most share prices. So stocks get only a very mild boost for beating estimates, but a major ding when they fall short. This quarter, according to figures compiled by the Wall Street Journal, the average stock that beat its earnings estimate has seen its share price go up by just 0.5 percent on the two days before and after its earnings report comes out. But stocks that come up short of their estimates lag by about 4 percent in that same time frame.
It seems that investors are getting wise to the notion that just about everyone beats their earnings estimate, because that increase is the smallest it's been – with one notable exception – in the past seven quarters. It's roughly half the long-term average of a 1.1 percent jump. The only time it has been lower recently was in the second quarter of 2011, when the average earnings-beater dropped 2.3 percent in the period around its announcement, at a time when the overall market was going through its August collapse. As recently as the first quarter of 2009, though, stocks that beat their earnings estimates rose an average of 5.0 percent around the time of their announcement.
Investors also may have noticed that companies have made a concerted effort to lower expectations this quarter. There's a trend to lower earnings estimates that has been going on for some time now: Back in April 2011, the average earnings estimate was at $26.04; by the end of the year, the average estimate for the first quarter of 2012 was down to $24.70. That figure kept falling, all the way down to $23.75 by the middle of March in preparation for this quarter's earnings. That's the all-time low ever since this figure has been kept.
