Corporate Earnings Have Tough Act to Follow

Corporate earnings are riding a truly remarkable hot streak and Wall Street sentiment is higher than it has been in years. Suffice it to say, the bar is raised for companies reporting their next round of earnings, which began in earnest July 17.

At 361 Capital, several of our investment strategies track analyst earnings estimates to predict how analyst expectations of a stock will change in the future. (You can read more about the strategies and how Wall Street analyst estimates influence stock prices in this paper.) As a byproduct of our process, we track many statistics on analyst earnings estimates and corporate earnings results. Some of those statistics highlight the rare air we are in when it comes to how companies surpassed earnings expectations last quarter, and how Wall Street analysts have raised the bar heading into this one.

Companies Put on an Earnings Show Last Quarter

For the three months ending June 30, 55% of stocks beat consensus estimates by more than one standard deviation. For perspective, this is the highest percentage of significant earnings beats we’ve witnessed in 15 years of collecting such data. Conversely, only 12% of companies reported one-standard deviation earnings misses, the lowest level since 2010.

In June, the spread between companies reporting significant earnings beats or misses was also at its highest level observed in 15 years.

Earnings surprises were strongest in the technology, materials and consumer discretionary sectors. In the technology sector, slightly more than 70% of companies reported one standard deviation earnings surprises.

As companies trounced earnings expectations, Wall Street sentiment has improved dramatically.

The Crowd is Now Hyped

We gauge Wall Street’s sentiment by measuring the number of positive and negative revisions to Wall Street analysts’ earnings estimates each quarter. By and large, analysts hold high expectations heading into this quarter.

On a rolling three-month basis, second quarter revisions were the strongest seen since the spring of 2012. The positive sentiment is a relatively new phenomenon. The net total of positive vs. negative earnings estimate revisions only flipped into positive territory in March. Before that, the monthly net total of analyst revisions had been negative for nearly every month dating back to mid 2014.

Estimate upgrades have been notably strong in the technology, industrials and health care sectors, while analysts have reduced forecasts for stocks in the telecom and energy sectors.

The Next Act

In aggregate, companies will be hard pressed to surpass earnings expectations at the historically high rate they did last quarter.

We see some early signs that analysts are beginning to have some doubts. While earnings estimate revisions for the entire quarter were the most positive since 2012, net positive and negative revisions were neutral for the month of June. The months ahead will reveal whether this marks a negative turning point or mere speed bump amid more positive Wall Street expectations. It should be interesting to watch as the next earnings show gets under way.

Learn more about how the behavior of security analysts influence stock prices