US earnings season is winding to a close. A casual observer might assume it’s been a stellar quarter, given the extent of the market gains. In truth, FactSet data indicates it’s been a mixed bag.
Companies did well when it came to revenues, with roughly 70 per cent beating expectations – in line with the average beat rate over the last five years. More impressively, revenues exceeded estimates by 3.5 per cent – the third-highest figure since 2008, notes FactSet.
Still, the number of companies beating earnings expectations was slightly below the five-year average. More notably, the average company exceeded estimates by 3.4 per cent – way below the five-year average of 8.8 per cent.
Not that investors cared. On average, companies that did beat expectations enjoyed unusually large share price increases. Indeed, even companies that missed analyst estimates tended not to be punished. According to FactSet, this marked the first time since the first quarter of 2009 that there was no negative price reaction to negative earnings surprises.
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Clearly, a lot of bad news was already priced in. FactSet notes markets reacted with euphoria to Netflix’s earnings beat, with shares soaring 18.4 per cent in the days after it topped expectations. However, Amazon’s earnings were greeted with similar fanfare (shares spiked 17.9 per cent in the days after it reported earnings) even though they were well below analyst expectations.
It wasn’t a great earnings season, but investors were simply relieved it wasn’t a terrible quarter. This fear was reflected in the S&P 500 trading at just over 15 times earnings in mid-June, compared to over 21 times earnings in early 2022. However, the recent rally means the index is now trading at 17.5 times estimated earnings, which is slightly above the 10-year average. From here, things get tougher.
