US Earnings Season
Fundamentals Update as at 10 January 2014 by Lorenzo Beriozza
This week the earnings reporting season has started — the start of which is traditionally marked by the earnings report from Alcoa, no longer a component of the Dow Jones Industrial Average, but still a well-known company. Alcoa’s report on Thursday, January 9, 2014 is joined late this week by reports from retailers Bed Bath & Beyond and Family Dollar. The earnings season tends to be a good period for stock market performance. Stocks posted gains during the six-week period that runs from two weeks before to four weeks after Alcoa reports since the bull market began around the start of the second quarter of 2009. In fact, nearly 80% of rise in the S&P 500 Index since the second quarter of 2009 took place during these quarterly earnings periods. Moreover, since the end of 2009, the entire gain in the index came during those quarterly periods, leaving nothing on average but volatility during the other seven weeks of every quarter. Will the stock market again welcome the news this earnings season? It should for three key reasons:
1. Stronger Guidance
We expect businesses to support their earnings outlook by citing the improving trend in economic data and the improved visibility now that the worst of the political brinkmanship is likely behind us. This should help boost business leaders’ confidence in future earnings growth and help to improve the outlook for future quarters. Most notably, the widely followed Institute for Supply Management (ISM) Purchasing Managers’ Index has a solid track record forecasting earnings growth in coming quarters. The latest reading, reported last week, confirms this indicator is suggesting a rebound in earnings and revenues in the quarters ahead.
2. Dividend Increases
Historically, the first few months of the year tend to be the biggest months for dividend increases. Increasing dividends helped to lift stocks in the first quarter of last year. In 2013’s first quarter, the S&P 500 Dividend Achievers Index, which measures the performance of companies that consistently raise their dividends, led the overall S&P 500 Index higher, outperforming by 2%. S&P 500 dividends have risen at a double-digit pace over the past year and are now about 30% above their 2008 peak.
3. Better International Results
About 40% of S&P 500 corporate profits are derived from global sources. U.S. companies have seen gains in export orders and economic growth in the Eurozone is expected by the consensus of economists to have been 0.4% in the fourth quarter, the fastest pace since the second quarter of 2011. This may result in better international revenue for U.S. businesses.
The consensus of Wall Street analysts’ estimates is for an overall pace of about 7 – 8% earnings per share (EPS) growth for S&P 500 companies. Given the history of earnings results during the reporting season, companies may beat the estimates by 2% to 3%.
Source: LPL Financial
