Earnings Update

February 25, 2014

Between the Winter Olympics and the constant cold weather that most of the country has been subjected to for about two months now, one pretty important topic has flown under the radar, earnings. With the closing ceremonies on our doorstep, it seems like a good time for an update on this very important topic.

About 90% of S&P 500 constituents have reported results, so barring any big surprises from major companies, we can pretty much put Q4 2014 in the history books. Standard & Poor’s shows that about 65% of the companies that have reported results have beaten Wall Street’s estimates.

This is about on par with the beat rate going back two years. 24% have missed estimates, and about 11% have met their targets. All in all, the beat rate is stable.

The energy sector had the weakest beat rate, at only 57%, and technology had the best beat rate at 75%. Again, nothing stands out here, as these beat rates are generally in line with the trends we’ve seen over the last couple of year.

It looks like the S&P 500 will have generated about $28.08 of quarterly operating earnings, and that will be yet another all-time record. For full year 2013, we should end up with operating earnings of about $107.13, and yes, that too will be another record high.

Reported earnings (i.e., the more conservative earnings metric which takes into account balance sheet adjustments) looks to come in at $100.78. You guessed it; another record!

With a closing price on Friday of 1,836, $107 in operating earnings and $101 in as reported earnings puts price-to-earnings ratios at about 17 and 18, respectively. This is slightly above the historical average but well within the range of fair value. As we have noted time and time again, unless near-term earnings growth disappoints, we see no reason that stocks can’t continue their advance.

Looking ahead, the extreme cold that has gripped much of the country has produced some weaker (but still growing) economic data, and that could translate into a slightly weaker than expected Q1 earnings season. When the thaw eventually comes—and it will—economic activity and earnings will likely rebound. We’re sure that our friends in the Midwest and East Coast will welcome that in more ways than one.

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