A Record Number Of Companies Are Beating Estimates... And It's Not Enough

Two weeks into earnings season, and with 53% of the companies in the S&P 500 having reported actual for Q2 2018, it's shaping up as a blockbuster quarter: in terms of earnings, 83% of companies have reported EPS earnings that are above estimates, and if that number carries through the end of earnings season it would be the highest percentage of beats since FactSet began tracking this metric in Q3 2008.

In aggregate, according to Factset, companies are reporting earnings that are 2.5% above the estimates (which however is fractionally below the five-year average). On the revenue side, more companies (73%) are reporting actual sales above estimates compared to the five-year average, while the average beat is 0.9% above estimates.

Looking ahead, the year-over-year sales growth rate for the second quarter is 9.3% today, slightly higher than the revenue growth rate of 9.0% last week. Positive sales surprises reported by companies in the Health Care, Information Technology, and Industrials sectors were the largest contributors to the increase in the revenue growth rate over the past week. While all 11 sectors are reporting year-over-year growth in revenues, four sectors are reporting double-digit growth in revenues: Energy, Materials, Information Technology, and Real Estate.

Armed with that information alone, one would think that the S&P has soared in the 2 or so weeks since the banks kicked off Q2 earnings season. Only that's not the case, and as the chart below shows, the S&P has barely budged in the time half the S&P has reported record earnings.

How come? The answer is simple - tech names, and specifically investor disappointment with outlooks beyond the current quarter, or as Bloomberg puts it, "investors are asking too much." Consider the following:

  • Netflix plunged even though its net income rose 600%.
  • Facebook just suffered the biggest drop in the history of US stocks, wiping out nearly $150BN in value, even though its revenue grew 42%.
  • Intel tumbled nearly 10%, wiping out $20 billion wiped from its value, even as it beat all estimates.
  • Twitter dropped more than 20% its biggest crash since 2014, despite beating on the top and bottom line.

While there are more examples, the message is simple: merely beating estimates is no longer enough. While all but one of the 36 tech firms that have reported results exceeded analyst estimates, over the next five days their stocks were down an average 3.5%. That compares with a gain of 0.9 percent for all S&P 500 stocks, according to Bloomberg calculations..

In other words, while the rest of the S&P is flying and generally remains inert to trade war concerns, for the software and internet titans that have led the bull market for nine years, "the strain of expectations is showing."

Perhaps the biggest driver behind investor disappointment is that so far at least, tech names have generally failed to impress in their pivot from staggering growth to a more mature phase, with "new responsibilities and expectations."

Companies are dealing with this new reality in different ways, with differing results.

Social media firms have seen the most upheaval: The world has woken up to the power of these services to influence elections, spread misinformation and collect personal data on a massive scale. Results from Facebook and Twitter show the impact of early attempts to address such concerns.

Netflix is no longer an upstart streaming service. It’s a Hollywood giant, and investors expect the company to execute each quarter. Google has had more time to adjust to middle age and has so far managed to keep revenue and earnings growth humming. Intel is downright old for Silicon Valley, but it’s struggling to get the next leg of its growth story -- 10 nanometer chip technology -- into gear

Some may counter that much of the upside was already priced in: after all recall that just four tech stocks, Amazon, Microsoft, Apple and Netflix, were responsible for 84% of the upside in the market in the first half of 2018.

The argument can therefore easily be made that much of the potential upside has already been priced in. And, as Bloomberg notes, "nowhere are high hopes more baked in than with Amazon, whose 55 percent rally in 2018 has left it neck-and-neck with Apple in the race to be the first U.S. company with a 13-digit market value."

Results from Jeff Bezos’s online superstore cheered investors Thursday. Its six-month net income was more than the previous seven quarters combined. The stock rallied, then gave most of it back.

Why? Because investors are suddenly waking up to the realization that not only does AMZN need to execute flawlessly, but it has to keep growing at a torrid pace to even approach some semblance of fair value.

Say its earnings in 2019 managed to be twice the $11.7 billion analysts predict. At $1 trillion, its price-earnings ratio would be a cool 43 -- more than twice the average valuation in the S&P 500.

Meanwhile, with speculation that the next recession is at most 18 months away, traders are concerned that there is little chance these companies will have the required runway to reach their full potential: consider that at 19x forecast earnings, techs are trading at a 10% premium to the S&P 500: the widest since 2009.

Worse, this premium is no longer warranted. In fact, Q3 will mark the first time since 2014 that growth in technology earnings will trail the rest of the market: "computer and software makers will boost profits by 18 percent between July and September, compared with 21 percent in the S&P 500."

Another way of putting it: with momentum having carried the day for so long, as fundamentals falling on the side, investors have been reminded to do some math... and they don't like the outcome:

“If revenue growth and earnings growth are going to fall and it costs you more to buy these stocks, then your return would be lower.” Myles VanderWeele, who helps oversee $4.5 billion as a principal at San Francisco-based BOS, said by phone. “That’s just a mathematical fact.”

Finally, the reason why markets seem to be ignoring the record Q2 earning season is that future growth looks downright gloomy by comparison: after surging 35% in the first three months of the year, tech profit growth is expected to decelerate in each of the following four quarters, reaching only 5.5% at the start of 2019.

And if tech grows just 5.5%, what's left for the rest of the market, especially with continued strong dollar headwinds, and the threat of a full-blown global trade war emerging in just a few weeks when Trump is expected to launch the next round of the US-China trade war.

But the worst news for investors is that for techs the period of unprecedented earnings growth-driven outperformance is almost over: starting this quarter, tech profit growth will be in line with the market over the next two years, if not slower - a major change from the last 15 quarters, when their rate of expansions exceeded the S&P 500’s by an average 6.5%. Which, for a global stock market that has only outperformed thanks to tech...

... is the worst possible news.


Looney TheSilentMajority Sat, 07/28/2018 - 13:34 Permalink


the question becomes how big can these companies grow

The real question is, how big can these companies grow WITHOUT the “mark-to-market” scam?

This abomination was supposed to help corporate balance sheets with illiquid assets during the financial crisis, but it’s been used for all assets, marking those to whatever the fuck the companies want.

Until it is reversed and all numbers are restated, going back to March 2009, not a single public company can be trusted.


In reply to by TheSilentMajority

Endgame Napoleon Looney Sat, 07/28/2018 - 14:40 Permalink

Aside from issues about a public shying away from marketing “teams,” constructing psychological profiles on them to sell products, how can these companies grow without a non-underemployed user base that can afford to spend money?

  • 101 million US citizens of working age are out of the workforce.
  • 78 million are gig pieceworkers.
  • 42 million are womb-productive citizens & noncitizens, working only part time to stay under the income limits for welfare programs that cover their major household bills, in addition to up to $6,431 in refundable child tax credits, when they have US-born instant-citizen kids. 

Millions of American citizens who aren’t on the pay-per-birth welfare train can’t afford rent, much less these products that marketing “teams” are peddling via methods that do not court customers so much as follow them around the internet, like an overbearing salesperson who does not meet the quotas on a showroom floor. 

But then, who am I to critique these giants. They have hugely sales—far beyond the sales of most retailers and the pyramid-scheme sales organizations that litter the internet, calling on “rock stars, athletes and new college grads to make six figures.............SIX FIGURES!!!!!!!!”

Where are all the decent-paying non-gig sales jobs for US citizens from these high stock performers? Oh, I know. I know. American citizens are just not “skilled” enough, even for sales.

Americans are not as skilled as a handful of marketing girls on a hip-young team or a handful of well-vacationed marketing moms on a moms-only family-friendly team, backed up by a battalion of bots.

Google worked on its Google Docs product and other things that people can use to do actual work. That probably helped them retain some gravitas. 

The others that offer less work-oriented products will have to find some way to convince people that the products, onto which they load so much information about their private lives, offer more ways to protect privacy. 

In reply to by Looney

1033eruth TheSilentMajority Sat, 07/28/2018 - 16:07 Permalink

TheSilentMajority said, The estimates are phony/rigged to purposely create the impression of a “beat.”

100%, got to give the algos, something to work with.  A company could be slowly sinking into the dumpster but as long as it beats the price will go up.  Algos aren't programmed to act on these SECRET estimates as they never make the media.  

In reply to by TheSilentMajority

shortonoil davatankool Sat, 07/28/2018 - 15:24 Permalink

The West has appeared to be doing fairly well recently because of the huge capital flows out of the EM that it has been absorbing. The EM is being bled to death, so expect them to take some kind of defensive action in the near future. The easiest method for them to alleviate some of the pressure being put on them would be to reduce their oil imports. They are also likely to seek funding from sources other than the US dollar; which keeps going up in relation to their own currencies. The Western Power Brokers have probably pushed this situation as far as it can go. The knock on effects will be felt by the entire S&P.

In reply to by davatankool

hooligan2009 shortonoil Sat, 07/28/2018 - 18:05 Permalink

the US is a nation of immigrants from all over the world - developed and emerging markets citizens make their homes here.

the only advantage that emerging markets have over US markets are lower tax rates and/or lower wages and/or no pensions/health/labor market protections.

consider this story


three years ago China only has the same number of accountants as the UK - around 300,000 for 1,300 million people  compared to 64 million in the UK. on a pro-rata basis, China needs around 6 million more accountants to become a "developed" country

in other words, China isn't even qualified to do the accounts for its companies, people or government. it is not (accountant) qualified to collect taxes, work out profits, calculate GDP or even set a tax rate at local, city, state, province or national level - yet this is the hottest area for investment managers to take US dollars out of the US ecnomy.

investment managers are perpetrating a fraud on their investors. they cannot do the books in china - or india. some asian markets perhaps.

for every twenty emerging markets outside the US, there are a thousand emerging markets within the US.

a non-US emerging market is simply a US emerging market - in shitholes like st louis, baltimore, detroit, shitcago or califuckunation ghettos. fund managers like plane rides, nice hotels and the chance to eat in fancy restaurants as the "cost of getting (non-existent ofr the last ten years) extra returns. 

look it up. developed market investment products charge onefifth the fees and, over the last ten years have beaten emerging markets by around 8% per annum for half the risk.

so .. why isn't there a huge effort to invest in US deprived cities that are crying out for investment, rather than emerging markets that look identical to US city shit holes?

american investment managers would far rather hire non-US citizens on fat salaries to underperform at the macro level than they would hire US citizens to make money here in the US, cos well yanno.. it looks good on tv shows like bloomberg and cnbc right?

In reply to by shortonoil

adr Sat, 07/28/2018 - 13:37 Permalink

What were expectations six months ago, and did the companies still beat that with huge blowouts?

Besting an expectation that was made two weeks ago isn't a big deal.

who cares Sat, 07/28/2018 - 13:46 Permalink

Since it is a concerted Ponzi scheme, estimates are made to be beaten and finacial engineering ignored. We are getting closer and closer to the reality check. Waiting impatiently.....  

Endgame Napoleon davatankool Sat, 07/28/2018 - 14:54 Permalink

The hardware companies need to bring upscale manufacturing back to the USA, creating some US jobs to generate good will, while likewise solving their intellectual property issue since the upscale tech is where the latest innovations are unleashed. I guess it is not so simple since they have international suppliers. They talk about Russians and election interference, but part of the public’s unease is connected to the fact that very little of the tech that was invented here—with the help of US taxpayer money—is manufactured here in the USA. And the programming and IT jobs are not very plentiful. Nor are the decent-paying sales and CSR jobs. 

In reply to by davatankool

hooligan2009 Endgame Napoleon Sat, 07/28/2018 - 17:42 Permalink

exactly right. the countries where the best and most rapid technology developments will be where the R&D is sourced but, just as importantly where the production is sourced so that "eureka" moments by some bright spark in production can lead to more efficiencies and innovations.

if you don't even bother to site production where you can keep it safe, secure and secret, you are giving away a massive learning curve to those that compete with you, and keep you "behind the (learning) curve.

makes you wonder how many "bits" in all the military and space hardware are also not made in the US, but are made in China, East Asia, Israel and Europe.

we know the US "global" car manufacturers have comepletely sold out/"dumbed down" and are waiting for Asia to invent a revolutionary new EV concept that will make US companies obsolete - pretty much like they did with motorbykes 60 years ago and desktops ten years ago.

criminal attitudes = short term gain for long term broke.

In reply to by Endgame Napoleon

arby63 Sat, 07/28/2018 - 15:05 Permalink

We haven't quite re-captured an actual economy yet. It will take several more years to undo 35 years of utter stupidity, chaos and treason.


hooligan2009 Sat, 07/28/2018 - 15:27 Permalink

why even bother with whether "estimates" are being exceeded or missed - they are only fucking estimates by analysts being paid 6 figure sums every year to fuck up.

why not chart ACTUAL earnings against the evolution of top-down and bottom-up analyst forecasts and highlight those that are persistently right or wrong?

then plot where macro economists have forecasted multiple contraction or expansion so that the combintion of multiple and earnings forecasting accuracy can be "solved"?

probably because the whole thing is a shit show and as useful as tits on a bull? that 90% of those engaged in the brokerage, investment, insurance and banking sectors ALONG WITH THE CENTRAL BANK cannot possibly have the remotest clue and, as such, are an overpaid bunch of gas bags, defrauding people of fees for no reason?

or maybe, the weight of the 90% of tosspots wants to make sure the 10% of the good guys never see the light of day and expose the 90% as snake-oil salemen/women/lbgtq's?

Yen Cross Sat, 07/28/2018 - 16:12 Permalink

  Who writes this tripe? 

  Companies are taking one time write downs, buying back shares, playing games with tax liability, and not investing in Capex.

 The assclowns that push this shit belong in the glue factory.