Q4 Earnings Look Great So Far
Last week the FactSet aggregate S&P 500 calculations were severely altered by Citigroup’s one time loss related to the tax cut. This week FactSet changed the numbers as they calculated Citigroup’s earnings to be $1.28 instead of -$7.15. This excludes the one time write off related to the tax cut. This changed the S&P 500’s blended EPS growth from -0.2% to 11.7%. This is the ultimate proof that the earnings write offs from Q4 will be swept under the rug. It’s a great deal for stock investors as no one seems to care about the write offs and everyone is paying up for stocks based on the tax cut helping increase future earnings. This is representative of the optimistic sentiment in the market. When investors are pessimistic, they focus on every negative and when they are optimistic, they only focus on the positives. This is what makes investing frustrating because one day an indicator/event matters and the next day it’s ignored. Therefore, it’s good to have your own opinion on what matters, to avoid the noise. You will be like a cat chasing its tail if you always focus on the last thing Wall Street cared about.
Since FactSet is ignoring the one time weakness at Citigroup, the earnings estimates for the quarter improved. One stat which hasn’t been messed with that much is the positive revenue surprises. As you can see from the chart below, 81% of firms have beaten revenue guidance. If this surprise rate holds, it would be the highest total since at least Q3 2008 when FactSet started calculating the results. This is 21% higher than the 5 year average beat rate. As of January 25th, 24% of firms had reported results. This week will be the biggest week of earnings season as many mega cap tech names will be reporting.
The chart below shows the expectation for revenue growth in the past 4 months. There was never a decline in estimates prior to the reporting period like usual. This makes the revenue beats even more impressive. The bar wasn’t lowered and companies are stepping over it easily. Most firms have yet to report, but the results so far justify the stock market rally. They needed to come in good because stocks rallied in anticipation of great results. I also think the economy is becoming a slight negative for stocks, which earnings need to make up for. The results from many of the January reports have been middling which is unacceptable for a market which is having one of the best starts to a year ever.
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