So as of October 21st about 64% of companies beat Q3 earnings estimates! On the surface, that seems great; however, take a look at the attached graph. As you can see, earnings beat rates are always around 64%.
As Bespoke notes, the earnings beat rates are higher than the last two quarters but still slightly below the average of the current bull market. Bianco Research, LLC research reaches the same conclusion.
In short, there appears to be nothing spectacular about 64% of companies beating earnings estimates. Having said that, the revenue beat rates appear to look a tad better. Why is that important?
- The first is that corporate margins are at all-time highs or close to that. Eventually there should be some mean regression and margins will compress. At that point the only way earnings can continue to impress is if revenue grows.
- Revenue growth is more of an indication of economic health than earnings, especially in this environment. As the consumer delevers top-line growth would be affected (more savings = less consumption). If revenue growth strengthens, it would be more of an indication the deleveraging process is becoming manageable and orderly.
So to conclude, just because S&P earnings are “killing” the estimates doesn’t necessarily equate to strong corporate earnings – earnings always kill estimates. Take a look at historical beat rates and make sure to look at top-line growth estimates too.
