As was the case during the fourth quarter of 2009, stronger than expected results from S&P 500 companies have been largely overlooked this earnings season as macro factors continue to dominate the landscape. The bulk of investors’ time this spring has been consumed by concerns over the challenges in Europe and the resulting impact of the collective actions taken to address the situation. The consequence of this has been a sideways path for the S&P 500 Index since the start of earnings season in mid April, however, prior to the difficulties highlighted by Greece, the Index had climbed over 13 percent higher since the lows reached in early February.
Some of the fuel for that rise came from increased investor confidence that a sustainable recovery had in fact been taking place in the U.S. The results so far appear to give credence to that belief, as companies have delivered both strong earnings and strong revenues that are beating expectations by a large margin.
From an earnings perspective, with 313 companies, or 63 percent of the S&P 500 reported as of April 29th, 82 percent have beat earnings expectations. This is the second highest percentage beat in the last 20 years with only the first quarter of 2004 coming in slightly higher. The year over year earnings growth has also exceeded expectations with the aggregate number coming in at 56 percent growth. Heading into the quarter, the consensus bottom-up estimate was for 40 percent earnings growth.
Additionally, the magnitude of earnings’ beats, or the percentage that results are above expectations, is extremely high at over 16 percent. The historical average for this figure is just 3.5 percent. The breadth of the strong earnings continues as well with nine out of ten sectors showing positive earnings surprises and every sector other than telecommunications actually delivering positive earnings growth. In fact, somewhat contrary to popular belief, earnings have been so strong that 30 percent of S&P 500 companies have already exceeded their prior peak EPS numbers.
Perhaps more importantly in the minds of some investors though is the fact top-line sales growth has been very strong. During much of last year, many companies missed top-line expectations but were able to deliver positive earnings surprises through aggressive cost cutting. The fourth quarter of 2009 represented a shift in the trend when after four quarters of sharp declines, sales growth for the Index turned positive at 2.8 percent (ex-financials), and more companies posted sales growth of greater than 10 percent than those posting declines of greater than 10 percent.
The results this quarter have shown even greater improvement. Of the 313 companies reported, 69 percent have beaten expectations. Impressively, almost 79 percent of companies are experiencing positive sales growth and the aggregate level of top-line growth now stands at 13.25 percent, well ahead of the consensus 10 percent growth heading into the quarter. All ten sectors have shown sales growth and the magnitude of the beats is roughly 1.25 percent. And as further evidence of the recovery, 33 percent of companies in the S&P 500 are now estimated to grow sales by greater than 10 percent this quarter.
Finally, companies have been providing very strong outlooks going forward. 11 percent of companies reported have increased guidance while only two percent have lowered. This would mark the only four quarter period where positive guidance outnumbered lowered guidance during the past decade, and the spread between positive and negative guidance has never been wider. At the Index level, industry analysts continue to move their projections upward with full year 2010 estimates ranging from the mid to low $80’s and the 2011 number climbing to over $95.
In conclusion then, first quarter earnings season has proven to be one of the best on record and increasing breadth and depth of revenue growth combined with improving guidance, has strengthened the perception that the quality of earnings continues to improve.
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