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March 5, 2020

Earnings Make the World Go ‘Round

by: Savant
Globe

In the world of capital markets, few clichés ring truer than “money makes the world go ‘round.” When analyzing public companies, investors generally use a company’s quarterly earnings report to determine whether they are making money or not. With the reporting of fourth quarter 2019 earnings starting to wrap up, now is an ideal time to get a pulse on whether U.S. companies are helping the world turn or if earnings growth is coming to a screeching halt. 

As each earnings season approaches, multitudes of analysts fine-tune their earnings estimates for every company under their coverage. Naturally, some firms will miss the consensus estimate and feel the wrath of market as efficient markets realize the company is not as profitable as they thought and therefore the stock is worth less. However, more often than not, the company meets or beats expectations. With approximately 95.2% of S&P 500 companies having reported fourth quarter earnings, 69.4% of companies beat expectations while an additional 7.7% managed to meet expectations. This falls ever so slightly below the longer-term average (since 2013) of 70.0% of firms beating expectations and 8.9% matching the estimates. However, with about 5% of companies still left to report, we find ourselves well within the margin of error to consider this quarter in line with the average we have seen throughout this economic expansion.

Perhaps more important than companies’ individual performance versus analyst estimates is the continued performance of S&P 500 index earnings as a whole. Shifting gears, again waiting for the final 5% of companies to report, S&P 500 12-month earnings look to have grown by 5.5% relative to 12 months ago. In fact, 12-month index earnings growth has been positive every quarter since the fourth quarter of 2016. While geopolitical events, pandemic risks, and other exogenous shocks may startle markets and dampen earnings in the short run, market fundamentals, such as earnings, drive long-term growth. While perpetual growth is unlikely, the market’s current underlying fundamentals look to keep the world spinning. 

Sources: JP Morgan and S&P Global 

This is intended for informational purposes only and should not be construed as legal, investment or financial advice. Please consult your legal, investment and financial professionals regarding your specific circumstances

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