Earnings Portrait Painted by Salvador Dali

  • 87% of S&P 500 companies beat estimates
  • Revenues lept as we lapped the worst of the pandemic
  • Expect slower revenue growth in the back half
  • Don’t expect sustained selloffs until the Fed eases off the gas

Why do Wall Street analysts have jobs?

Show me another profession where you get paid to be wrong that often.

They slap a buy rating AFTER a stock rises and a sell rating after it craters.

But their earnings estimates…

Frustrated Come On GIF by Saturday Night Live

You need to know the real story.

We plan to give it to you.

And to be fair to the analysts, companies often throw out low guidance they can easily beat.

Remember, there was a pandemic

While analysts are typically wrong, the degree they were wrong got worse.

Take this last quarter for example.

For the S&P 500, 89% of companies reported.

Of all those companies, 87% BEAT EXPECTATIONS!

That would mark the highest percentage exceeding earnings expectations since 2008, according to FactSet.

The 5-year average is 75%.

Here are some key points about this earnings season for the S&P 500:

  • Year-over-year (YOY) revenue growth in Q2 was 24.7% compared to the 5-year average of 4.5% and the 10-year average of 3.4%.
  • 8 of 11 sectors reported double-digit growth let by energy at 112.8%.
  • Analysts expect double-digit growth for the remainder of 2021 but at a slower pace.
  • Fun fact: Caesar’s Entertainment (CZR) reported the highest revenue growth in the S&P 500 in Q2, up +1,878%.

None of this should be a mystery to folks.

Everyone around the world was in lockdown Q2 of last year.

GDP decreased 33.3%, the worst in modern history.

However, that doesn’t account for why the estimates were off by so much.

Companies said nothing

Many companies provide forward guidance for analysts in their earnings calls or statements.

It’s usually a range for both earnings and revenues.

Q1 of this year was much different.

Coming off a wave of infections with the vaccine still in its infancy, most simply couldn’t predict where things would head.

So, they decided to say nothing.

Analysts were left trying to figure out the problem.

What most people don’t realize is that earnings and revenue estimates aren’t from one person. They’re the average of many different analysts.

Fun fact: This is known as ensemble forecasting. Weather forecasters use the same tool. The idea is no one model is good but the average is.

So, while some folks got it spot on, many missed by a mile since they didn’t have corporate guidance to work with.

What we can expect

As we noted earlier, analysts expect revenue growth to continue the rest of this year at a slower place.

That’s pretty obvious.

We won’t see true normalized comparisons until probably Q2-Q3 of next year.

Remember, many reopenings didn’t happen in the U.S. until May of this year.

Much of the globe is still restricted in some form.

For example, international air travel is a fraction of what it typically is.

Here are the real questions we need to be answered:

  • Will companies miss revenues because of shortages in labor or supply? 
    • Car companies already said they would.
  • How will commodity prices impact earnings? 
    • Surprisingly, very few mentioned it this last quarter.
  • What lasting effects has Covid had on our behaviors?
    • Online shopping blew up. But is brick and mortar completely dead now?
  • Can the company survive in a higher rate environment
    • Online shopping blew up. But is brick and mortar completely dead now?

Our hot take

Everything boils down to one question…

Is the market headed higher?

If the last 10+ years have taught us anything, it’s that the Fed controls the levers.

Until they pull back on asset purchases and then raise rates, we’re unlikely to see sustained selloffs.

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