Q2 earnings season is now over, and for the most part, corporate America had a strong showing. Earnings per share reports were stellar overall, though revenues were a bit light in spots. Despite the strong season, the market didn’t seem to react accordingly, burdened with generally weak economic data and an increasingly uncertain macro environment.

The divergence between earnings and stock prices can be explained by the fact that, despite strong EPS figures, some companies had difficulty meeting revenue estimates. Thus, traders remain concerned about the potential for earnings to continue to grow in what appears to be a stagnating environment. A second aspect is a bit more prevalent. Currently, an influx of poor economic data, negative market media, and lowered GDP estimates make equities seem risky at this point. Investors have rushed into gold and bonds in attempt to protect their capital, though many analysts warn of a looming bubble burst in both vehicles.

Another reason a strong earnings season did not do much to push the market upwards is due to a change in the nature of the game. High frequency traders make up 70% of daily volume on the NYSE, with the potential to push the market more than 2% up or down on a daily basis. Correlations are at an all time, upwards of 82% at present time. The means that no matter how strong a company’s numbers are, movement in the stock price is unlikely to escape the program trades for more than a day or two. So while some companies experienced 3-5% moves higher following a positive earnings announcement, a few days later, they tended to be back at the whim of the market movers.

Last but not least, a reason from an historical standpoint. Stock returns tend to peter out when earnings soar. While this sounds a bit counterintuitive, Ned Davis Research shows that when year-over-year changes in the S&P 500 earnings are +20% or higher, the market gains just 1.5% per year. However, when 12-month earnings growth has been between -10% and -25%, stocks have soared at more than +26% per year.

How can this be, you ask? There are two key points that explain this phenomenon. First, lest we forget, stocks look forward and not back. Thus by the time the year-over-year change in earnings is severely negative, the stock market has had time to discount the bad environment (via a bear market). And since most bears are relatively short-lived, things have usually begun to improve by the time the 12-month rate of change in earnings gets really bad.

Turning to the actual earnings season data, StreetAccount reports that 468 companies in the S&P 500 reported earnings through the end of last week with 79% “beating” estimates. This is the good news.

The bad news however, is that only 62% of the companies beat on the top-line revenue basis.

Here is a summary of the results for Q2 earnings season:

S&P 500 Summary:

• Total Reports this season: 486
  • Earnings Per Share “Beats”: 79%
  • Earnings Per Share “Misses”: 21%

  • Revenue “Beats”: 62%
  • Revenue “Misses”: 38%

Top Earnings Figures by Sector (% of “Beats”):

• 1) Industrials: EPS – 86%, Revenues – 68%
  
• 2) Health Care: EPS – 84%, Revenues – 61%
  
• 3) Financials: EPS – 84%, Revenues – 60%

Weakest Earnings Figures by Sector (% of “Beats”):

• 1) Materials: EPS – 70%, Revenues – 60%
  
• 2) Energy: EPS – 71%, Revenues – 45%
  
• 3) Miscellaneous (Utilities & Service-Oriented): EPS – 74%, Revenues – 55%

Top Performing Sectors (% Gain in Index during Q2 Earnings):

• 1) Materials +4.7%
  
• 2) Industrials +2.7%
  
• 3) Consumer Discretionary +1.6%

Laggard Sectors (% Gain in Index during Q2 Earnings):

• 1) Financials -4.8%
  
• 2) Technology -2.2%
  
• 3) Health Care -0.8%

Data Source: StreetAccount.com

 

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