Earning season gets solid marks - but market reaction is confusing

by Wayne Ferbert on February 19th, 2013

So, far, with S&P 500 earnings season more than 2/3rds complete, the season is likely going to be labeled a modest success – emphasis on the word modest.
According to FactSet (you can read the report here), thru Feb 8th, 72% of the companies that reported beat the mean estimate for their EPS number. That compares very closely to the average of 69% beating for the last 4 quarters.
Perhaps more impressively, 67% of companies have exceeded the sales estimates in the quarter compared to the analyst estimates. In the last 2 quarters, this was only 41% and the average for the last 4 quarters is 50%.
On the surface, this sales metric would seem really positive. But we have to remind ourselves that many estimates were revised downward last quarter on weak guidance. In addition, while total revenue grew 3.8% so far, if you remove Prudential alone, the growth rate was 2.4%, according to FactSet. The expectation on Dec31st was for 2.2% growth. So, not a significant increase – but at least the increases are hitting many more companies than normal.
Overall, according to S&P, the total operating EPS for 2012 is expected to be LESS than 1% higher than the actual operating EPS from 2011. When you consider all of this, you can see why we would consider the earnings season so far to be a “modest” success. After all, the last quarter provided a lot of forward skepticism on corporate earnings but the numbers seem to be stabilizing.
So, while corporate earnings look to be stabilizing on very small growth, the markets have rallied in the new year. The rally has started to flatten but still trending up. We are up 7% in the new year.
The question to ask yourself: does the market look like it is getting ahead of earnings? We would say the market rally does look a little heated – and driven more by a rotation of money to equities, versus a fundamental valuation rally.
We aren’t ready to exit this market yet – but we wouldn’t be invested without protection either. Get your protection in place - especially while volatility is at historical lows.

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