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Quarterly Earnings Avalanche – What the %&*$# is Going On?

July 27, 2009 at 4:00 am Leave a comment

Last week we received an avalanche of earnings reports (with a ton more reporting this week) and investors are now interpreting the data.

The recent stock market rally can be simply boiled down to companies releasing better than expected quarterly earnings.  As my great pal Peter Lynch says, “People may bet on hourly wiggles of the market but it’s the earnings that waggle the wiggle long term.” A whopping 77% of S&P 500 companies that have reported Q2 (June) earnings thus far have reported earnings results better than Wall Street expectations. Earnings estimates are being ratcheted up for the first time since August 2007. Intel got the party started in the technology world, trouncing both top and bottom line estimates. Certainly, overall, the top line results for corporations have been more challenging and mixed. However, with additional earnings available to companies, more resources can be plowed back into future marketing and revenue generating activities. Moreover, due to the extreme cost-cutting measures taken, once the economy recovers, corporations will be able to tap into the enormous earnings power potential created.

Click Here for CNBC Quarterly Earnings Recap

Across all industries, whether it’s Fred Smith (CEO at FedEx) or Eric Schmidt (CEO at Google), we’re hearing a common theme that although the environment remains challenging, we have stabilized with the worst behind us. When and by what degree the economy turns around is still unclear, but all I know is that great companies don’t disappear in bear markets and as a country we have persevered through many, many recessions and financial crises in our history. In times like these, market leaders and industry innovators use their competitive advantages to step on the throats of their competitors and do whatever it takes to gain market share, so that when things actually do turn, the tide will carry them to the front of the pack.

Although the quarterly reported earnings coming out have in general been relatively anemic, investors should not sit idle.  I continue to scour income statements, balance sheets, and cash flow statements to see who is gaining share at the expense of their peers. At the end of the day those share gainers are the ones that will be growing earnings and cash flows the fastest when the economy turns. Investors shouldn’t forget the lessons of 2008 and 2009. Although not all the economic news headlines were bad in the first half of 2008 (as the stock market began its rapid descent), the same principle applies in reverse – as the market has rebounded from the March lows, not all the economic news has been encouraging. Volatility can in fact be a beautiful thing, if you have a disciplined systematic approach in place that opportunistically takes advantage of appealing prospects as they arise. Without doubt, the relative attractiveness of the overall market is less than it was in March 2009, but let’s not forget the stock market is still more than 35% below the market highs of late 2007.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

Entry filed under: Financial Markets, Stocks. Tags: cnbc, earning reports, estimates, Google, Intel, Peter Lynch, Q2 earnings, quarterly earnings, S&P 500, Wade Slome.