If Wall Street is trying to find a reason to be bearish, corporate earnings won't be much help. They look darn good so far.
Despite the usual jitters that accompany each earnings reporting season, 65% of the third- quarter reports to date have met or exceeded analysts' expectations, says Ben Zacks at earnings tracker Zacks Investment Research in Chicago.
At this time last quarter (i.e., three weeks into the reporting season), 62.5% of reports met or topped expectations, Zacks says. At this point in the first quarter, the figure was 60%.
In part, more companies are meeting or exceeding estimates because Wall Street has lowered its sights in recent months, Zacks says. In July, analysts thought the average company in the Standard & Poor's 500-stock index would earn 28% more in the third quarter than a year earlier. Now, the average expected gain is a less heady 17%.
Nonetheless, the bulls say what's important is that earnings overall still are rising. If that trend continues into 1994 and then into 1995, stocks in general are likely to keep advancing, though of course with periodic setbacks.
Some Wall Streeters say they've noticed a perverse sense of disappointment among big investors so far this quarter. As earnings estimates have dropped in line with the still-sluggish U.S. economy and the deep recession in Europe, some investors may have hoped for a large number of third-quarter earnings bombs--enough to trigger the long-predicted 5% to 10% "correction" in stock prices.
"My impression is that people really wanted the third quarter to be bad," says Melissa Brown, who follows earnings trends for Prudential Securities in New York. A broad stock selloff, she notes, would give many skittish investors an excuse to jump into the market, especially if they have large cash piles waiting to be put to work.
Instead, most stock indexes jumped to record highs between Oct. 1 and last Friday. Despite a minor selloff this week, the S&P 500 index remains just 0.9% below its peak.
On Thursday, a batch of unexpectedly good earnings reports demonstrated that investors still are eager to reward most companies whose results beat expectations. That's important, because it's a measure of the market's underlying bullishness.
Software giant Computer Associates, for example, said Thursday that it earned $87.5 million, or 51 cents a share, in the quarter ended Sept. 30, up 86% from a year earlier. Wall Street had expected just 35 cents a share. Stunned, investors bid the stock up $4.875 to a record $38.
Likewise, heavy-machinery maker Caterpillar Inc. again surprised analysts, earning 95 cents a share from operations in the third quarter, far above the 58 cents Wall Street had expected. The stock, which has been soaring all year, jumped $2.75 to $85.875, an all-time high.
It's also true, however, that a few of the best earnings surprises this quarter \o7 haven't \f7 been rewarded. Bank stocks, in particular, have fallen, even though their third-quarter results far exceeded expectations. L.A.-based First Interstate, for example, earned $1.80 a share in the quarter, 7% above consensus estimates. But the stock has tumbled in recent weeks from $68 to $60.75.
When buyers stop flocking to companies that are beating expectations, there's usually a simple explanation--investors don't believe earnings can get significantly better for those companies. As a rule, when Wall Street sees earnings peaking, even if the actual peak is a quarter or two away, stocks stop rising. Nobody, after all, wants to be the last one into the pool.
In the case of the banks, investors believe that an improving economy in 1994 is likely to pull interest rates up, albeit slowly. Rising rates could squeeze bank profit margins. So, investors increasingly view the banks as a market sector whose greatest earnings gains are behind it.
Yet, the cheering receptions for such technology and industrial names as Computer Associates, Caterpillar, Tandy, Cummins Engine and Compaq Computer on Thursday strongly suggest that Wall Street sees no earnings peak on the horizon for those companies.
A healthier economy (here and abroad) in 1994 may not be the best environment for banks, but it is exactly what the majority of American companies--and their investors--have been awaiting for a long time. Think of it this way: If those companies can produce strong earnings gains now, in a still-weak economy, imagine the kind of numbers they're capable of showing with even a slight improvement in demand next year.
Wall Street is still in the mood to reward better than expected earnings, as the results below show. The "Est." column shows analysts' consensus estimates for third-quarter earnings per share (EPS), while the "actual" shows what the companies reported Thursday.
Quarterly EPS: Stock close Company Est. Actual and change Computer Assoc. $0.35 $0.51 $38, +4 7/8 Cummins Engine 1.67 1.98 83 7/8, +4 5/8 Genl. Instrument 0.37 0.45 56, +3 1/4 Tandy Corp. 0.46 0.52 38 3/4, +3 1/8 Caterpillar 0.58 0.95 85 7/8, +2 3/4 Sears 0.81 0.94 59, +1
EPS numbers are operating results (excl. onetime items).
Source: Zacks Investment Research