One Of The Stock Market's Most Consistent Trends

Second quarter earnings season kicked off on Friday with the nation’s largest banks announcing financial results for the April-June reporting period.

Over the next few weeks, all of the big publicly-traded companies will tell us how they did in Q2 and provide guidance for what they believe is to come in the next few quarters. (Bloomberg’s Esha Dey and Jess Menton have a great roundup of the narratives to watch in the earnings announcements.)

Will we get the bad news that puts an end to the market rally and send prices spiraling lower? Maybe. But that seems unlikely.

If a company’s financial performance is way out of line with analysts’ expectations, they’ll usually make an announcement before releasing quarterly results or they’ll have insiders signaling to analysts to revise their estimates.

So with that in mind, don’t be surprised if earnings season follows the oft-repeated pattern of most companies beating earnings estimates. It’s one of the most consistent trends in the stock market.

As the chart below from Deutsche Bank’s Binky Chadha shows: In every single quarter since 2006, no less than 60% of S&P 500 companies have reported quarterly earnings per share (EPS) that beat analysts’ expectations.

Most companies report better-than-expected earnings. (Source: Deutsche Bank)

Also, don’t be surprised if those EPS results beat estimates by a margin of around 5%.

On average, companies beat EPS estimates by around 5%. (Source: Deutsche Bank)

By the way, my favorite anecdote related to all of this comes from DataTrek Research co-founder Nicholas Colas (via the May 1, 2023 TKer):

…It took me many years to develop a ‘hack’ that eventually landed me consistently on the Wall Street Journal’s list of analysts with the most accurate earnings estimates. Over time I realized that companies always beat the consensus of analysts’ estimates by about 5%. So, a week or two before an earnings announcement I would set my estimate to 5% above the Street’s number…

Zooming out

Whether or not a company beats or misses earnings estimates may contribute to short-term volatility.

Also, none of this is to suggest that “better-than-expected” earnings won’t prevent stocks from pulling back in the near term. Price movements can be hard to predict over short periods of time.

But from a long-term, high-level perspective, I don’t think earnings season will be unusually notable unless the developments force analysts to make major adjustments to their outlook for earnings, which continues to look up.

On July 2, RBC’s Lori Calvasina raised her year-end target for the S&P 500 to 5,700 from 5,300. This was her third revision from her initial target.

“The story we see in our data for 2024 is that the stock market has gotten a bit ahead of itself from a valuation perspective, as well as on some of our sentiment work, but that some of our tools (including one of our sentiment models) do still point to the potential for the S&P 500 to move a little bit higher between now and year-end,” she wrote. “We think risks of a near-term pullback are growing, but for now think one would be temporary and limited to the 5-10% range. This is similar to the call we made at the end of March. We’ve described ourselves as a ‘tired bull’ and ‘neutral’ recently. Today, we would alter that slightly and characterize ourselves as a “nervous and jumpy bull.”

On Monday, Oppenheimer’s John Stoltzfus raised his target to 5,900 from 5,500. This is his second revision.

“S&P 500 earnings results over the most recent three quarterly reporting seasons (Q3 ‘23, Q4 ‘23, and Q1 ‘24) and economic data that has provided evidence of resilience underpinned by the Fed’s mandate-sensitive monetary policy remains at the core of our bullish outlook for stocks,“ he wrote.

On Wednesday, Yardeni Research’s Ed Yardeni raised his target for the first time to 5,800 from 5,400.

“The stock market seems to be discounting our Roaring 2020s scenario faster than we expected,” Yardeni wrote. “The bull market might continue to achieve our targets ahead of schedule.”

Calvasina, Stoltzfus, and Yardeni are not alone in tweaking their forecasts. Their peers at Citi, Capital Economics, Goldman Sachs, UBS, Morgan Stanley, Deutsche Bank, BMO, CFRA, Societe Generale, BofA, and Barclays are among those who’ve also raised their targets.

Don’t be surprised to see more of these revisions as the S&P 500’s performance, so far this year, has exceeded many strategists’ expectations.