Learning from earning season

More than a week into the second quarter’s earnings season, it’s time for some first conclusions.

About one in five S&P 500 companies had reported by the end of last week, and this week and next week will see another 309 companies report, providing plenty of micro news.

What have we learnt so far?

A few statistics stand out:

• Around 85% of companies have beaten analyst expectations, which is a good 10% more than in an average quarter.

• So far, companies have beaten expectations by 18% on average, compared with the 3-4% standard in the past. This number is likely to drift lower because results to date have been skewed towards the financials sector, which has significantly beaten estimates, but even excluding financials the beat so far stands at 11%.

It’s too early to draw firm conclusions at the sector level, as there are not yet representative samples in all sectors. But thus far, the biggest upside surprises have been in the consumer discretionary sector, both in terms of revenues and margins.

Last week’s results also confirmed what we expected: it’s much easier to beat analyst expectations than investor expectations. Despite the stellar stats mentioned above, the market impact of beating estimates has been smaller than usual.

For us, the first big takeaway at the macro level is that there have been no nasty surprises hidden in company reports. We have not had a raft of companies warning about the impact of rising raw-materials prices after renewables group Siemens Gamesa* cited such cost pressures in disappointing results earlier in the month.

Second, analyst forecasts should increase after this results season. That would pull down price-to-earnings ratios and, unless the S&P has a big rally over the summer, this should alleviate some concerns over valuations among investors.

*For illustrative purposes only. Reference to a particular security is on a historical basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.