Breathe, folks, because earnings season is coming to a close. Earnings season is the roughly six-week period where more than 90% of the United States' largest publicly traded companies report their financial results from their previous fiscal quarter. However, you could make a strong case that earnings season never truly ends, with at least a handful of publicly traded companies always reporting their financial results in a given week.
Continue Reading Below
While you'd be strongly discouraged from allowing a single quarterly report to frame your entire investment thesis on a company, earnings reports are closely followed by Wall Street because they're key to helping investors properly analyze and value companies. For instance, the overall quality of earnings reports relative to expectations for the broad-based S&P 500 (SNPINDEX: ^GSPC) can give us clues as to the health of the U.S. economy and stock market.
Three surprising trends that developed this earnings season
Through Friday, Aug. 11, 91% of the S&P 500's slightly more than 500 companies had reported their second-quarter (or most recent fiscal quarter) results, according to data from FactSet Research Systems via its Earnings Insight report. And among those more than 450 S&P 500 companies that have reported over the past six weeks, three surprising trends have emerged.
1. S&P 500 companies overwhelmingly trounced earnings and revenue forecasts
Arguably the biggest telltale number this earnings season, and a major reason why market indexes have been flirting with or hitting new all-time highs, is the percentage of S&P 500 companies that have topped profit and sales forecasts.
Continue Reading Below
According to FactSet, 73% of S&P 500 companies surpassed Wall Street's consensus earnings per share (EPS) forecast, while 69% topped the Street's sales projections. A 73% beat rate for EPS really isn't that much out of the ordinary, but a 69% beat rate for sales is a massive jump from where we were just one year ago. FactSet Earnings Insight's Q2 2016 roundup showed that 70% of S&P 500 companies topped EPS estimates, but only 53% surpassed the Street's sales guidance. That's an enormous year-over-year increase, and it suggests that growth rates may be stronger than expected.
Why the revenue beat for so many publicly traded S&P 500 stocks? One big reason is energy stocks. Energy had the strongest sales growth of any of the 11 sectors through Aug. 11, at 15.5%. While the subgroup of oil and gas drilling companies saw their revenue fall year over year, oil and gas exploration and production companies saw revenue soar 30%.
Another under-the-radar factor just might be currency fluctuations. Last year we saw major upheaval caused by Brexit, leading to currency headwinds that wreaked havoc on the sales figures of U.S. multinationals. With currency fluctuations far tamer in 2017, those5 movements are no longer dragging down sales well below Wall Street' estimates.
2. Topping expectations was met with a decline in share price
However, a really odd trend emerged for the nearly three in four S&P 500 stocks that have surpassed profit expectations thus far. According to FactSet, S&P 500 companies that delivered a positive earnings surprise have had their share prices fall by an average of 0.3%, compared to a five-year average return of 1.4% on a positive earnings surprise. Comparatively, negative earnings surprises have performed right in line with their five-year average loss of 2.4%. In fact, this would mark the first negative reaction to positive earnings surprises since the second quarter of 2011.
Why the pessimism? It probably doesn't have to do with guidance, since more S&P 500 companies have issued positive than negative guidance in their latest round of reporting.
More than likely we're seeing investor skittishness due to all three major stock indexes regularly knocking off new highs. Since 1950, there have been 35 corrections totaling at least 10% (when rounded) in the S&P 500, but we've witnessed very little in the way of corrections since the Great Recession ended and U.S. stocks bottomed. In short, expectations for stocks may be so lofty, and investors so eager to find a reason to sell and lock in profits, that "selling the news," so to speak, has been the result.
3. Multinationals with a bigger reliance on international sales outperformed
Finally, a really interesting development has been that companies with higher international sales generation have performed better. According to the data of the 91% of S&P 500 companies that have thus far reported, companies with less than 50% of their sales generation coming from the U.S. saw average revenue growth of 6% and average earnings growth of 14% over the past quarter. Comparatively, companies that had more than 50% of sales generated in the U.S. delivered an average sales growth rate of 4.7% and earnings growth of 8.5%.
The difference, again, appears to be the energy sector. Higher energy commodity prices, a stabilization in crude prices, and efforts by OPEC to cut oil production have effectively calmed some nerves and sent growth for multinational energy companies soaring.
Additionally, this data could be a testament to growth in emerging and developing markets in regions like Southeast Asia, Africa, and the Middle East. The allure of emerging markets is that they can often grow at a superior pace to developed countries, regardless of whether those developed countries have entered a period of slower growth or recession.
While the U.S. stock market might appear pricey, FactSet's data would suggest that growth is strong enough, for the time being, to support investors' lofty expectations.
10 stocks we like better than Wal-Mart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Wal-Mart wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017
The author(s) may have a position in any stocks mentioned.