Third-quarter earnings season has been a win for stocks. Here’s why.

  • By Al Root,
  • Barron's
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Third-quarter earnings have been good enough. That’s a painfully obvious, backward-looking observation. After all, stocks are higher. The Dow Jones Industrial Average (.DJI) is up 3% over the past 30 days, and both the S&P 500 (.SPX) and the Nasdaq Composite (.IXIC) set intraday and closing records on Friday. Still, it’s a good idea to literally take stock from time to time and look at the forest, forgetting the trees.

Here’s how the third-quarter earnings season is shaping up—by the numbers.

About 60% of the companies that are components of the S&P 500 are surprising to the upside—beating Wall Street estimates—on sales. And about 80% of companies’ bottom lines are surprising to the upside.

Don’t forget, a majority of companies always beat sales and earnings estimates. Setting expectations low and hurdling over a low bar has long been considered the best strategy for companies when dealing with Wall Street.

Still, the surprise percentages are up from the second quarter. About 55% of S&P 500 companies beat sales estimates in the second quarter. About 75% of companies beat earnings estimates. Third-quarter earnings season looks good after beating those metrics.

Sales and earnings growth decelerated, however, in the third quarter from the second quarter. Sales growth for S&P 500 companies has been about 3% in the latest quarter compared with 3.6% in the second.

Earnings growth is actually negative, at about minus 1% in the third quarter. Earnings growth was about positive 1% in second quarter.

Does that mean the earnings recession is here? Not really. Companies are lapping tough comparisons following the Trump corporate-tax-rate reduction which impacted 2018 earnings growth. What’s more, big negative earnings comparisons are confined to energy and materials sectors. Those companies are struggling with falling commodity prices.

On the whole, things look OK. Of course investors know that because the Dow is up—just 12 points away from a new all time high.

So far, 358 companies in the S&P 500 have reported quarterly results this earnings season.

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