Sunday, November 3, 2013

S&P 500 at Record High As Expectations Cut- Factset

Must be that expectation for better second-half growth. That are QE is manipulating share prices higher despite a lagging fundamental background. I find it intriguing that Q3 sales appear weaker than normal but earnings are somewhat better. This seems like accounting games, cost cutting, and other non-fundamental machinations. It also could be that the inverse relationship between government and individual saving rates versus profit margins again is at work.

via Factset

During the month of October, analysts lowered earnings estimates by 1.5% in aggregate for the fourth quarter for the S&P 500. This percentage decline was below the 1-year, 5-year, and 10-year averages for the first month of a quarter. Despite the decline in earnings expectations, the value of the index increased 4.5% during the month. This marked the seventh time in the past nine quarters that earnings estimates dropped and the value of the index rose during the first month of the quarter.

 S&P 500: Q4 Bottom-Up EPS Estimate vs. Price
Is it unusual for the bottom-up EPS estimate for the index to decline and the value of the index to increase during the first month of a quarter? In recent quarters, it has not been unusual. In fact, it has occurred in seven of the past nine quarters (including Q4 2013). During these seven quarters, the average decrease in the bottom-up EPS has been 2.6%, while the average increase in the value of the index has been 4.7%.

Of the 366 companies that have reported earnings to date for the quarter, 74% have reported earnings above estimates. This percentage is above the average of 73% recorded over the past four years. In terms of revenue, 53% of companies have reported sales above estimates. This percentage is below the average of 59% recorded over the past four years. In aggregate, companies are reporting earnings that are 1.4% above the mean EPS estimate. This percentage is also well below the average of +6.5% over the past four years. If this is the final surprise percentage for the quarter, it will mark the lowest surprise percentage since Q4 2008.

The blended earnings growth rate for the S&P 500 overall for Q3 2013 is 3.0% this week, above last week’s growth rate of 2.3%. Upside earnings surprises reported by companies in the Information Technology (including Apple and First Solar) and Health Care (including Pfizer and Merck) sectors were mainly responsible for the increase in the growth rate during the week. On September 30, the Q3 earnings growth rate for the index was also 3.0%. However, only two sectors have witnessed a decline in earnings growth rates since that date: Financials and Energy. Eight sectors have seen an increase in earnings since the end of the quarter, led by the Information Technology and Materials sectors.

The blended earnings growth rate for the quarter is 3.0%. Eight of the ten sectors are reporting an earnings increase for the quarter, led by the Consumer Discretionary (8.9%), Materials (8.8%), and Information Technology (8.4%) sectors. On the other hand, the Energy (-9.1%) and Financials (-0.8%) sectors have the lowest earnings growth rates for the quarter. The blended revenue growth rate for the index for Q3 is 2.9%, up from an estimate of 2.7% at the end of the third quarter.

The upcoming week marks the final “peak” week of the Q3 2013 earnings season, as one Dow 30 component (Walt Disney Company) and 78 S&P 500 companies are scheduled to report earnings for the third quarter.

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