Third quarter earnings season has all but ended and once again S&P 500 earnings outstripped analysts’ expectations. A report from Smith Group Asset Management indicates that after 94% of the benchmark’s constituents had reported, 77% had beaten consensus operating earnings estimates with a median upside surprise of 4.2%. Meanwhile, 67% of those reporting surpassed consensus sales estimates with a median outperformance of 90bps. The median earnings growth over the 3rd quarter of 2009 was 16.30%.
The majority of companies within each of the 10 economic sectors represented in the index surpassed expectations. The percentage of companies exceeding earnings expectations ranged from a low of 62% within the utilities sector to a high of 94% within the information technology sector. Consumer discretionary stocks had the largest median upside surprise with the median company surpassing earnings estimates by 6%. The consumer staples had the weakest median upside surprise with the median company outperforming consensus expectations by 1.1%. Telecom earnings were flat versus a year ago and those of consumer staples rose 7.5%. Each of the other eight sectors registered double-digit earnings growth ranging from 10.30% for the energy sector to 44.2% for information technology.
Stocks have been driven higher as earnings have consistently outperformed consensus expectations during the recovery, but earnings remain more than 13% below the peak set over the 12 months ending in June 2007 (Chart 1). However, according to Smith Group, median estimates for both the 4th quarter and next year call for benchmark earnings to grow 12.50%. As such, it is likely that trailing 12-month operating earnings for the S&P 500 will reach a new high in the 3rd or 4th quarter of 2011.
As of this writing, 99% of S&P 500 companies have reported. Third quarter operating earnings for the index advanced 36.75% to $21.58/share, leaving trailing 12-month operating earnings at $79.02/share. The benchmark ended the quarter trading at 1,141.20, or 14.44 times trailing 12-month operating earnings. While the index has rallied approximately 7% quarter-to-date, its P/E ratio on trailing operating earnings as of yesterday’s close remains below the median level of the last 22 years (Chart 2 & 3). We believe that the current multiple suggests that large cap domestic equities are neither particularly undervalued nor too rich.
NOTE: Our last post noted the difference between the performance of the cap-weighted S&P 500 and that of the index on an equally weighted basis. You may be interested to know that the benchmark’s earnings per share are neither cap-weighted nor equally-weighted. Rather, S&P aggregates total earnings for the 500 constituents, which are then divided by a divisor, which itself is a function of the benchmark’s market value and its price.