Every three months we are treated to a six-week period of publicly traded companies announcing their just completed quarterly financials; also known as earnings season. Companies will release their earnings and then Wall Street analysts will scurry to compare the actual earnings to their estimates. If a company exceeds the estimates and maintains or raises the company’s outlook, many times you will see a company’s stock price rise. And of course, not achieving estimates will result in the opposite. While we don’t buy or sell investments based on success or failure over a three month stretch, we do our due diligence paying these earnings releases their fair attention.
Therefore, what has the 2nd quarter earnings’ parade produced and more importantly what do they say about the future? As of the second week of August, 91% of companies in the S&P 500 Index had reported their earnings. Of these companies, 79% reported earnings above their estimates. In total, companies are reporting earnings that are 5% above the estimates, which is above the 5-year average. In addition, companies are reporting sales that are 1.3% above estimates, also above the 5-year average.
Quite simply, this past quarter’s earnings are telling a positive story for our economy. But that is in the past, what about the future? Judging by this chart, the next year and a half is expected to experience similar earnings growth.
Combined, based on the recent past and the near future estimates, companies are projecting to do well from a financial perspective. But, how can this be after eight years of earnings growth?
Last time I checked there is no rule that says an economy can’t keep growing for nine, ten, eleven, etc. years (especially when a major corporate tax cut was just enacted). Of course, many things can happen to derail the expected growth. Political missteps that might harm versus help U.S. Companies or maybe overzealous tightening by the Federal Reserve that can crimp growth too fast. Many actions outside the control of business executives can slow this economic expansion.
But, the chart above is essentially a summary of what the 500 most valuable companies in the U.S. expect to do in the coming year and a half. And it is these companies, believe it or not, that drive this economy. So, to answer the initial question, what are earnings telling us (if anything) … they are telling us we are in a good period of economic growth and it is expected to continue. Things can definitely be worse! Stay tuned to see how this plays out…