Personal Investor: When quarterly earnings season becomes a circus
With the third quarter earnings parade kicking into high gear this week, it might be a good time to step back and assess what those meets, beats and misses really mean.
As of Friday, 84 of the companies in the S&P 500 posted their earnings, and 78.6 per cent of them managed to beat analyst expectations, according to financial data firm Refinitiv. That rate might seem impressive but it’s nearly in line with the 77-per-cent average over the past four quarters. It is, however, well above the long-term average of 64 per cent.
You might be tempted to think that the corporate world is getting better at turning out profits, but some companies may also be using a financial slight-of-hand to pave the way for a gangbusters earnings report. Analyst ratings are only as good as the guidance provided by a company, and in many cases companies will understate earnings to make a splash when they report.
In some cases it works and the stock gets a jolt but according to Whisper Number, an earnings tracker that uses several criteria to project earnings, there is no proven long-term correlation between earnings beats and stock performance. In fact, Whisper Number says there is no proven long-term correlation between entire earnings season beats and the broader stock markets.
What really matters is a company’s financial results themselves. Third-quarter earnings for the entire S&P 500 are expected to increase by 22.2 per cent from the third quarter of last year.