Earnings Season Has Been Good, But With One Big Alarming Trend

With almost 20% of the S&P 500 having reported earnings it’s useful to take a look at the broad trends thus far.  As expected the data looks very good from the early reports:

  • 74% of companies are beating EPS estimates
  • 86% of companies are beating revenue estimates.
  • Revenues are growing at a 9% year over year rate.
  • Revenues per share are growing 7.5% year over year.
  • Energy (23%), industrials (10.3%), tech (13.8%) and telecom (16.65%) are all experiencing double digit YoY revenue growth.
  • The current 2011 estimate is calling for $94.96 or 13.5% YoY EPS growth.

All in all the numbers continue to reflect an environment of very high margin expansion and reasonable revenue growth.  The most reassuring element is the growth in revenues.  While domestic revenues are likely to remain meager, international growth is contributing substantially to the diversified income statements of corporate America.  On the whole, this remains an earnings environment that is supportive of stock prices.

One alarming trend in the early weeks of this earnings season is a drop in my Expectation Ratio.  At a level of 1.12 the ratio, which measures the strength of corporate income statements compared to investor expectations, is now more consistent with an environment that is becoming fully priced into expectations.  Recent economic improvement and the market rally has clearly contributed to increasing optimism about future profits.  While the ratio does remain positive at 1.12 it could be a prelude to an environment where estimates are becoming excessively optimistic and expectations of future earnings growth (and equity market expansion) are potentially too high and widely acknowledged/priced-in.  Persistent readings below 1 would be cause for concern.



This post previously appeared at PragCap >

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