How has the earnings season gone? But, more importantly, how have stocks reacted to those earnings releases? Going into earnings, investors had great concerns about the 3rd quarter, as well as forward earnings visibility.
Historically, earnings reports have exhibited a bit of sandbagging where the CEO or CFO will set the bar for forward visibility low……..and when that next reporting date comes, it will be easy to jump over and “beat”. Of course, stock analysts at major wirehouses crunch their own numbers. At times these are at odds with a company's internal estimates. If you add in the “crowdsourced” estimates from novice investors, there is a wide variation in these estimates. We believe analysts are having a particularly difficult time with their accuracy right now. Inflation, recession, shrinking margins complicate these calculations…..much like economists handicapping the overall economy. Now that Q3 earnings are complete, 71% of the S&P 500 who have reported their results have seen a positive EPS surprise.
How have individual sectors of the S&P 500 reacted? This examination becomes more interesting when looked at from a sector perspective. The two sectors with the highest positive EPS surprise percentage are energy and technology, which each saw 80.95% of their names beat estimates.
Technology - Technology did not share in the strong forward returns despite having a high number of companies beat expectations. However, a Technology sub-set, Communication Services (think Facebook and Google) saw the lowest percentage of positive EPS surprise of any sector at 48%, and was also the only sector with more than half of its S&P 500 constituents falling short of the consensus EPS estimate. That carried over into weak returns for communication services, as the names that missed expectations showed an average loss of -8.96% on the day following the release.
Energy - Energy also saw its representatives have the highest average forward return one day after a company’s earnings release.
Healthcare - Healthcare was one of the more interesting examinations, as the sector did see over 75% of names beat estimates, higher than the average for the broader index. The average forward returns for the healthcare stocks that beat estimates were also the highest of any sector over a forward one-day and one-week timeframe. However, the healthcare stocks that missed expectations saw sharp declines, posting some of the weakest returns of any sector.
Q4 earnings releases will be in late January into February. We will see how accurate analysts' estimates will be. We expect less volatility in the context of a market gaining additional momentum from October’s bottom.