Corporate earnings over the past two weeks gave investors an injection of much-needed good cheer, with most of the roughly 20% of S&P 500 companies to report thus far bearing expectations. Yet these positive numbers may mask some troubling signs, analysts say.
Some three-quarters of the 140 companies that have reported third-quarter earnings beat Wall Street’s estimates for net profit. While that strength is encouraging, corporations have been less stellar when it comes to hitting revenue targets, according to data from Bespoke Investment Group.
“So far this season, just 58% of companies have beaten revenue estimates, which would be the weakest reading seen in six quarters. That indicates that companies are having a more difficult time meeting sales expectations,” analysts at Bespoke said in a note.
Data from FactSet Research also suggest that although more than half of the corporations are exceeding revenue expectations, the overall pace has slowed.
“In aggregate, companies are reporting sales that are 0.5% above estimates, which is below the five-year average,” John Butters, senior earnings analyst at FactSet, said in a report.
Soft revenue numbers have weighed on the market with stocks falling an average 0.71% once the earnings have been released, according to Bespoke analysts.
Bespoke Investment Group
“We’re seeing investors ‘sell the news’ regardless of whether it’s good or bad. The average stock that has beaten EPS estimates has opened higher on the day by 80 basis points, but it has then traded lower by 34 basis points from the open to the close of trading,” the analysts said.
Corporations that have reported inline earnings per share have seen their stocks fall 1.46% at the open and then slide another 0.42% during the session. But companies that have fallen short of expectations have seen their stocks getting crushed, gapping down 5.45% with the opening bell and then closing out the session 0.24% lower.
“Anyone who thought that earnings weakness may have been priced in already given the drop we saw in early October has been quite mistaken so far,” said the Bespoke analysts.
To cure the market of this new malaise, companies will have to step it up and start reporting higher revenue-beat rates, the analysts said.
“A nice open to close move from one big-name blue chip could also help to reverse the trend of selling,” they said.
This week, 158 S&P 500 SPX, -0.04% companies are slated to announce earnings including 10 Dow Jones Industrial Average DJIA, +0.26% components such as Boeing Co. BA, -0.86% Microsoft Corp. MSFT, +0.15% and Intel Corp. INTC, -2.16%
Stocks have been under pressure in October with all major benchmarks lower for the month as fears about the impact of higher interest rates on the economy and a protracted U.S.-China trade war spooked investors.
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