Surprising Corporate Earnings Buoy Stocks
Kurt Brouwer October 26th, 2009
One element in the stock market’s strong showing this year is simply a reaction to last year’s horrendous downdraft. Another element that has more substance is improving corporate earnings.
This charts shows results the percentage of companies that are revising earnings upward (or downward). The chart tracks the S&P 1500, which is a broader index than the S&P 500. The S&P 1500 covers about 85% of the U.S. stock market.
In this chart, the blue line shows the price movement of the index on the left axis and the red line shows the percentage of companies (right axis) that were either raising or lowering earnings estimates at a given point in time. Currently, the red line indicates that a number of companies are now revising estimates upward (above zero on the right axis).
Last year and even early this year, most companies were revising earnings estimates downward in line with the slumping economy. Eventually, that trend began to reverse and the number of companies posting reduced estimates began to diminish. The improved outlook for earnings coincided with the low point stocks hit back in March.
Source: Bespoke
Corporations are revising their earnings estimates upwards as we can see from the chart. Yet, they are also beating those upwardly-revised estimates. This is what needs to happen for a while if stocks are to go on a sustained upward path. As the folks at Bespoke put it:
…Upside estimates have been outpacing downside estimates for a few months now, and companies have still been able to beat estimates at a high rate, which we believe is a major reason for the rise in the overall market…
This chart, also from Bespoke, shows the percentage of corporations beating their earnings estimate and puts this period in the context of the recent past:
Source: Bespoke
Bespoke continues:
In conclusion, the data shows that companies have been beating raised estimates and not lowered ones during this bull market…
The key issue here is the long-term trend. Are corporate earnings just bouncing back from last year or are they embarking on a new, sustained uptrend? We will keep watching this and let you know.
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