While it remains relatively early in the 1st quarter reporting season, S&P 500 earnings continue to outperform analysts’ expectations. Smith Group Asset Management recently reported that with 56% of the S&P 500 having reported 1st quarter earnings, 80% of those reported beat consensus earnings estimates while 74% surpassed consensus sales estimates. The median earnings surprise was 4.8% better than estimates while the median upside sales surprise was 1.50% greater than consensus estimates. For those companies that have reported, the median earnings growth over the same quarter last year was 20.50%. Of the 10 sectors in the benchmark, all but telecom and utilities, which combined comprise about 6% of the benchmark, have experienced double-digit earnings growth.
Thus far, the financial, healthcare, and industrial sectors have seen the largest percentage of their benchmark constituents report. The financials, with 65% of the benchmark’s constituents having reported, have experienced by far the largest median earnings surprise, with the median reported upside surprise surpassing consensus earnings expectations by 9%. They have also experienced the largest median earnings growth, 34%, over the 1st quarter of 2010. With 67% of the benchmark’s healthcare constituents reporting, 91% have surpassed consensus earnings estimates and 83% have beaten consensus sales estimates. The median earnings surprise was 4.70% while the median sales surprise was 1.30%. Within the industrial sector, 75% of the benchmark’s constituents have reported with 88% surpassing earnings estimates and 76% surpassing sales estimates. The median earnings surprise was 4.80% while the median sales surprise was 1.60%.
Trailing 12-month operating earnings on the S&P 500 remains below its peak reached in the 2nd quarter of 2007. However, they are fast approaching that level and will very likely surpass it either this quarter or next (Chart 1).
Additionally, the multiple on trailing operating earnings remains well below the median level of the last 22 years (Chart 2). While the level established over the last two decades is higher than longer term historical norms, the market is more reasonably priced than it has been for most of the last 20 years, especially when one considers that operating earnings are likely to continue to expand at least through 2012. Currently, the median estimate calls for 2011 S&P 500 earnings growth of 13.70% and revenue growth of 7.50%. Both are very healthy numbers and with earnings and revenues continuing to exceed consensus estimates, if anything, they likely underestimate the strength of companies’ earnings power.
Additionally, the multiple on trailing operating earnings remains well below the median level of the last 22 years (Chart 2). While the level established over the last two decades is higher than longer term historical norms, the market is more reasonably priced than it has been for most of the last 20 years, especially when one considers that operating earnings are likely to continue to expand at least through 2012. Currently, the median estimate calls for 2011 S&P 500 earnings growth of 13.70% and revenue growth of 7.50%. Both are very healthy numbers and with earnings and revenues continuing to exceed consensus estimates, if anything, they likely underestimate the strength of companies’ earnings power.
Peak to trough, trailing 12-month operating earnings on the S&P 500 declined 55.88% from June 2007 through March 2009. They have now doubled from their lows. Having strongly recovered from their lows, quarterly comparisons will become more difficult moving forward. In the process, margins have surged and companies have dramatically cuts costs. However, productivity growth has peaked and companies have been adding new hires. As such, if margins are to expand further, revenues will have to continue to surpass expectations.