This earnings season is better than you think

  • By Jack Hough,
  • Barron's
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We’re halfway through earnings season, and results are better than promised, otherwise known as just as expected.

Two-thirds of S&P 500 index (.SPX) companies that have reported results for the fourth-quarter tally have topped earnings estimates. That’s because weeks before earnings seasons, companies and analysts perform a sultry tango of lowball guidance and estimate cuts, and the result is usually a rose-in-teeth CEO leaping over the consensus on reporting day.

Better to judge surprises by looking at price action rather than earnings. Slightly fewer companies have popped than flopped on quarterly reports. Not quite olé! but still OK.

With or without share price gains, all of those earnings beats have pulled the fourth-quarter growth projection predictably higher. At the end of last year, S&P 500 earnings were expected to decline 1% during the fourth quarter, but that has improved to a 0.3% decline. Keep an ice ax and crampons handy, because at this rate, summiting zero is not out of the question. And things will look easier after that.

Early forecasts for full-year 2020 have earnings growing by an ambitious 9%. Don’t count on it, but the first-quarter prediction of 4% growth looks reasonable.

That’s because last year’s go-nowhere earnings weren’t the result of economic weakness or trade tensions, says Credit Suisse analyst Jonathan Golub. They were mostly traceable to challenges across energy and in certain tech stocks, like Facebook (FB), which is spending heavily to address user outrage over the way users outrage one another.

Golub expects economically sensitive industries, including energy and tech, to jump back to peppy growth in 2020, and for steadier industries to be not much worse off. If all goes smoothly—and if the coronavirus outbreak can be brought under control—rising earnings will help S&P 500 members grow into last year’s price gains. The index, before a recent dip, briefly touched its highest forward price/earnings ratio since 2002.

There is a subtle but tasty piece of statistical support for improving growth. Fourth-quarter growth for the S&P 500 will be pulled lower by index members with heavy earnings weightings and sharp earnings declines. Boeing (BA) and Exxon Mobil (XOM) stand out. These are not quite offset by hefty growers like Apple (AAPL) and Microsoft (MSFT).

Ignore the gravitational pull of such titans. The median company in the S&P 500 is expected to report 4% earnings growth during the fourth quarter. If anyone knows the ticker for this Median Co., I recommend buying shares immediately.

Back to the fourth-quarter reports we’ve seen so far. There have been thrills and spills. I’ve been trying not to watch General Electric (GE) stock, with its come-hither 53% gain last year, because I’ve been heartbroken by complicated industrials before. But on Wednesday, it blew past free-cash-flow estimates and predicted more of the same. Shares jumped 10%.

Also on Wednesday, semiconductor specialist Xilinx (XLNX) shed 10%, because the evening before it had beaten earnings estimates but issued weak guidance and announced staffing cuts. Management blamed sluggish spending by data center and 5G customers, but this was not the company’s only post-earnings selloff over the past year. Its name might be fitting, beginning and ending as it does with the symbols for strike one and strike two.

On Wednesday afternoon, Tesla (TSLA) beat earnings estimates, and the stock shot 10% higher the following day. One analyst said a blue-skies outcome for the stock could take it to $1,000 from a recent $635—and he has a Neutral rating. On the earnings call, CEO Elon Musk said he thinks that “retail investors” have “better insight than many of the analysts.” The bronze bull a few blocks from Wall Street hasn’t spoken since.

Apple and Amazon. com (AMZN) trounced estimates and shares jumped. Facebook beat on earnings, but the stock slumped. A 25% rise in revenue was outpaced by a 34% climb in costs. “My goal for this next decade isn’t to be liked, but to be understood,” co-founder Mark Zuckerberg said on the call. The not-liked part of his guidance seems achievable, maybe even conservative.

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