Stocks got another lift this week from second quarter earnings surprises. In our June 29, blog we said that earnings for the second quarter would be better than expected. In that blog, we said that cost controls would be the driving force behind the better-than-expected earnings. It is now clear that cost controls at all levels and in all sizes of companies are winning the day and producing earnings surprise after earnings surprise. Here's the scorecard so far with 179 of the S&P's 500 companies reporting:
- The average surprise or beat rate is 11%, higher than the normal 3%-5% surprise.
- Thus far, there have been 136 companies that have beaten their Wall Street estimates versus 43 that have missed. This 75% beat rate compares favorably with the 62% beat rate from last quarter.
- The most important earnings surprises continue to be in the Consumer Discretionary sector, where 22 companies have reported positive surprises versus 2 negative surprises. In the Finance sector, there have been 26 positive surprises compared with 14 negative surprises. The Health-care sector has also registered impressive results with 21 earnings beats and only four earnings misses.
These better-than-expected earnings have driven stock prices through the 9,000 on the Dow, a level not seen since January. We believe the earnings surprises will continue, although we continue to think it will get progressively tougher to impress the market. This could lead to a flattening of the markets for a few weeks, as investors digest the new data.
Another key ingredient in this quarter's earnings is how they stack up with last years earnings. At the beginning of the quarter, the analysts were predicting that earnings this quarter would be about 30% lower than a year ago. Thus, far earnings are about 26% lower than a year ago. The Energy and Basic Materials sectors are weighing down the average earnings results, with both showing more than 50% declines in earnings.
We'll give you another report the end of next week.