With earnings season all but concluded, S&P 500 earnings have once again exceeded consensus estimates. According to Smith Group Asset Management, with 93% of S&P 500 companies having reported 4th quarter 2010 earnings, 75% exceeded consensus earnings estimates while 69% exceeded sales estimates. The median earnings surprise was 3.7% while the median sales surprise was 1%. The median earnings growth over the 4th quarter of 2009 was 17.6%.
The percentage of companies surpassing earnings and sales estimates are similar to that of the 3rd quarter. However, there has been greater dispersion across sectors than there was during the 3rd quarter earnings season. Smith Group reported that after 94% of S&P 500 companies had reported 3rd quarter earnings, the majority of companies within each of the 10 economic sectors had surpassed consensus expectations, ranging from 62% of utility companies to 94% of technology companies. However, with all of the telecom companies within the benchmark having reported 4th quarter earnings, only 33% surpassed consensus expectations. Meanwhile, with 97% of the benchmark’s utilities companies having reported, half surpassed expectations.
Earning surprises are once again being led by companies in the healthcare, consumer discretionary, and technology sectors. All of the healthcare companies in the benchmark have reported 4th quarter earnings and 92% have beaten expectations. With more than 80% of the consumer discretionary and technology companies having reported, 83% and 86%, respectively, have surpassed consensus earnings expectations.
The median earnings and revenue surprises for the telecom and utilities sectors were negative. The energy sector had by far the largest median upside surprises to earnings and sales at 8.6% and 3.5%, respectively. Each sector experienced double-digit median earnings growth over the 4th quarter of 2009 with the exception of the utilities, which suffered a median earnings decline of 30bps. The financials posted the strongest growth, with median earnings rising 29.90%. The consumer discretionary, industrial, and technology sectors also experienced median earnings growth north of 20%.
As of this writing, 99% of S&P 500 companies have reported 4th quarter 2010 earnings. Operating earnings have advanced 27.85% over the 4th quarter of 2009, less than the 36.75% pace of the 3rd quarter, but very attractive nonetheless. Importantly, Smith Group notes that recently there have been more upward revisions to sales growth than to earnings growth, suggesting that revenue growth may begin to play a larger role in earnings surprises than margin expansion. As of Friday’s close, the benchmark is trading at 15.75x trailing 12-month operating earnings; below the median level of the last 22 years (Chart 1). While we would argue that the largest stocks within the large cap market are inexpensive relative to the rest of the US equity market, the current multiple on the S&P 500 suggests that the large cap market is neither particularly rich nor cheap.
