Make no mistake about the importance of corporate earnings releases to investors. Earnings results, which act as a company report card, are a key factor used by investors to form opinions about a stock's value and potential price trajectory.
Corporate earnings releases in the U.S. happen quarterly and generally cluster together in a period known as earnings season
(1). The results are highly anticipated and broadly discussed among investors and analysts. While earnings releases are backward looking, management commentary and analyst Q&A during the call can reveal potential clues about upcoming quarters and contribute to the refinement of future expectations for company performance.
To put in perspective how much talk there is about "corporate earnings", a Google search of the term will produce roughly 400 million results in about half a second. (2)
Before we dive in, let's get two key terms defined: revenue and earnings.
Revenue is the total amount of money generated by a company's operations, over a given time period, usually a quarter (e.g. Q1: January to March, Q2: April to June, Q3: July to September and Q4: October to December).
Revenue is often referred to as a company's "top line" by financial professionals, or, more simply, I often call it "the ring the cash register number." It's the financial gain generated through sales of products and/or services rendered.
Earnings, or income, is what's left of the revenue after expenses. A company generates revenue from selling its products/services, then subtracts all the costs to produce those products/services, and the remainder is earnings. In contrast to "top line" revenue, earnings is often referred to as the "bottom line".
(3)
Table 1: Definition of Revenue and Income
For Q1 2024, with 93% of S&P 500 companies reporting results as of the date of this writing, 78% of S&P 500 companies have reported a positive earnings per shares (EPS) surprise
(4). Earnings growth for Q1 2024 for the S&P 500 is estimated to be 5.7%. If 5.7% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q2 2022 (5.8%).
(5)
In terms of revenue, 60% of S&P 500 companies have reported revenue above estimates; however, that is below the five and ten-year averages of 69% and 64%, respectively.
(5)
Currently, the market is rewarding positive earnings surprises reported by S&P 500 companies slightly less than average while punishing negative earnings surprises reported by S&P 500 companies more than average.
Table 2: Price Return Impact of Positive & Negative Earnings Release Surprises (5)
| Surprise |
Price Return +/- 2 Days of Q1 2024 Earnings Release |
5-year Average Price Return |
| Positive |
+0.9% |
+1.0% |
| Negative |
-2.8% |
-2.3% |
Earnings releases can also give clues as to what companies are thinking. Is management worried about geopolitical events? The election? Tariffs? Economic factors? Lately, with it on the minds of so many Americans, company executives continue to address "inflation" on earnings calls.
In the transcripts of all the S&P 500 companies that conducted earnings calls from March 15th through May 17th, 219 mentioned "inflation" during their earnings calls, but marks the seventh consecutive quarter in which the number of S&P 500 companies citing the term has declined.
(5)
The number of S&P 500 companies citing "inflation" on earnings calls for Q1 2024 is still well above the 10-year average of 180.
After closely watching the results from the Q1 2024 earnings season, we at WT Wealth Management feel most companies are in good financial health. Of note, and good for the companies, but bad for the consumer, companies have pushed much of the inflation pressure onto the consumer through higher prices, smaller portions
(6) or both. This has allowed many companies to preserve margins in direct-to-consumer businesses.
Reading the tea leaves in the earnings releases, we have started to see a small uptick in layoffs coupled with diminishing job openings as a result of unprecedented wage growth since the end of the pandemic. One bullish catalyst is the generational amount of spending on data centers, cloud infrastructure and artificial intelligence.
There are always concerns no matter how well earnings season is presented to shareholders. Global and domestic political uncertainty is not an environment where companies will traditionally take risks. Coupled with a higher-for-longer mantra from the Federal Reserve (referring to target interest rate levels), smaller companies will continue to have higher borrowing costs than larger companies. The longer interest rates stay elevated the more strain will be put on companies to issue bonds, gain credit and secure financial backing for expansion.
Earnings season is always an exciting time in the financial markets. At this point, with 93% of companies reported, I give it a B+. It was good enough to continue to propel the current rally despite rate cuts being kicked down the road along with the host of uncertain geopolitical events materializing around the world. We are already looking forward to the Q2 2024 earnings season, set to kick off in about six weeks, to see what new information we can glean about the strength of the stock market and future expectations.
FOOTNOTES
- Earnings season doesn't have precisely defined dates, but generally start one or two weeks after the end of the calendar quarter and last for about six weeks thereafter.
- https://www.google.com/search?q=corporate+earnings&oq=corporate+earnings
- A company's bottom line may be described as "in the black" (meaning positive income) or in "in the red" (meaning negative income, or losses).
- A "surprise" in the context of earnings releases is when actual results differ materially from the average consensus of analysts. Surprises can be positive or negative and generally have an immediate impact on the company's stock price as expectations of the company's performance adjust to the new information.
- Earnings Insight
FACTSET
- This pricing strategy has been coined "shrinkflation".
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