S&P 500 Earnings Beat Estimates Which Continue to Fall; ShadowStats Financial Forecast

By the Curmudgeon



From Bank of America Merrill Lynch (BoAML) Global Research:

S&P 500 Companies Earnings:

A BoAML Global Research report states that with 92% of S&P 500 companies having reported earnings, bottom-up 3Q-2019 Earnings Per Share (EPS) beat earnings estimates by 2% (with a -1% YoY change in earnings).  That means that S&P company earnings have declined in the 52 weeks ending September 30, 2019 yet the S&P index is up over 20% during that time.

Despite the earnings beat, 4Q earnings estimates continued to fall, now indicating flat EPS YoY vs. +3% as of Oct 1st. 

39% of companies beat on both sales and EPS the 3rd quarter, slightly above the historical average of 37% and just below last quarter's 40%.  Health Care and Tech saw the highest proportion of beats (67% and 62%, respectively), while Utilities and Materials saw the fewest (7% and 15%, respectively). Price reactions were a little more pronounced than usual, both on the outperformance for beats and underperformance for misses.

Commentary on earnings calls suggests companies are still seeing weak trends: mentions of "better" or "stronger" vs. "worse" or "weaker" are at the lows in 2015-16 manufacturing recession. However, companies have continued to express a much more optimistic tone than in recent quarters, with 43% of companies mentioning "optimistic" or "optimism" during earnings calls, in line with the historical average vs. just 37% last two quarters.

Capex from S&P 500 reporting companies grew +4% YoY in 3Q, accelerating from +2% YoY in 2Q, driven by Energy and Communication Services.

Stock reactions following earnings reports have been slightly bigger than usual this earnings season in both directions (up and down).  On average, companies that missed on both EPS and sales underperformed the S&P 500 by 2.6%, compared to the historical average of 2.4%, while companies that beat on both EPS and sales have outperformed the S&P 500 by 2.0% the next day, compared to the historical average of 1.6%.  Please refer to the table below.






















Average relative post-reporting performance (vs. S&P 500, in % for companies based on surprise



1 day

5 day

Start of reporting season to 1 day after reporting

Start of reporting season to 5 days after reporting

EPS Beat





EPS Miss





EPS In-Line





Sales Beat





Sales Miss





Sales In-Line





Both Beat





Both Miss





Source: FactSet, BofA Merrill Lynch US Equity & US Quant Strategy


What about Small Caps?

444 S&P 600 companies have reported. Earnings are 1% higher than forecast while sales are 1% lower compared to where estimates stood at the start of reporting, while large caps are on track for a 2% earnings beat and in-line sales.

3Q S&P 600 earnings are tracking -8% YoY on sales growth of +2% YoY - lower on earnings and sales growth vs. large caps. This marks similar trends from 2Q (-10% YoY earnings growth on +3% sales growth). On a median basis, small cap earnings are tracking flat on +2% YoY sales growth.  It’s a similar story on earnings (0%) and sales (+3%) versus last quarter. Small caps are on track for a third consecutive quarter of negative earnings growth. Ex-Energy, aggregate earnings growth are +2% YoY.


From FactSet Earnings Insight:

Of the S&P 500 companies that have reported 3Q-2019 earnings, 75% have reported actual EPS above the mean EPS estimate, which is slightly above the five-year average of 72%. In aggregate, earnings have exceeded expectations by 3.8%, which is below the five-year average of 4.9%. 

Curmudgeon Comment: This confirms the “managed earnings” game that company financial officers play with Wall Street analysts.  They purposely lower forward earnings guidance to come in with an earnings beat that drives up the stock price.

Indeed, companies in the S&P 500 that have reported positive earnings surprises (aka “earnings beat”) for Q3-2019 have seen an increase in price of 2.3% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive earnings surprises have witnessed a 1.0% increase in price on average during this four-day window. Thus, the market is rewarding positive EPS surprises more than average during the Q3 2019 earnings season.

S&P 500 EPS Surprise vs Avg Price Change

Why is the market rewarding companies (on average) that have reported positive earnings surprises? It is likely not due to EPS guidance or analyst revisions to EPS estimates for the fourth quarter. In terms of earnings guidance from corporations, a higher percentage of S&P 500 companies have issued negative EPS guidance for Q4 2019 to date (72%) compared to the five-year average (70%). In terms of revisions to EPS estimates, industry analysts made larger cuts to EPS estimates for Q4 2019 over the first month of the quarter (-2.9%) relative to the five-year (-1.7%), 10-year (-1.2%), and 15-year (-1.9%) averages for the first month of a quarter.

It is interesting to note that the market is also punishing negative EPS surprises less than average. Companies in the S&P 500 that have reported negative earnings surprises for Q3 have seen a decrease in price of -1.8% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported negative earnings surprises have witnessed a -2.6% increase in price on average during this four-day window.

Curmudgeon Comment: This seems to indicate a very benign (and forgiving) market where reported earnings take a back seat to Federal Reserve injected liquidity and easy money policies.  Also, there continues to be tremendous amount of stock buybacks that lift prices even if actual earnings decline.

Closing Comments from ShadowStats John Williams:

In a recent report for his subscribers, John wrote that he expects to see:

A bottoming in the short-term selling of precious metals and a short-term topping in rallying equity prices are likely in the week ahead. Pending are negative (worse-than expected) economic headlines. Those reporting trends should intensify, as extended, new headline numbers tend to reconfirm the weakening activity.

The week ahead will see reporting of October Industrial Production and Retail Sales (November 15th), along with the Consumer and Producer Price Indices (November 13th and 14th) for the month. Collapsing Industrial Production is expected to continue, with ongoing impact from the General Motors strike, which began in September and ended in late October. Nonetheless, continued weakness in a variety of other manufacturing industries, and in oil exploration, should hit headline production activity worse than expected.

Headline Retail Sales is expected to gain 0.2% to 0.3% in the month, but weaker growth is long overdue. Given headline monthly CPI (November 13th) likely rising into the 0.3% to 0.4% range, that retail sales growth would be non-existent from a “real” economic standpoint.

End Quote:

"I much prefer the sharpest criticism of a single intelligent man to the thoughtless approval of the masses." Johannes Kepler


 Good luck and till next time……

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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