As second-quarter earnings season starts to heat up, investors are likely to hear repeatedly that the bar has been set too low and that results will not be as bad as anticipated. However, recent research from S&P Capital IQ reveals that one of the best ways to find out what companies will beat expectations in one quarter is to look at those with prior quarter’s biggest positive surprises.
S&P 500 companies beat S&P Capital IQ quarterly consensus forecasts 66% of the time since 2005, a reminder that Wall Street analysts tend to be more cautious with their forecasts than warranted. Yet we found that this conservatism has been even more prevalent for those companies that beat expectations by more than 10% (big beat) and less prevalent for those companies that missed by more than 10% (big miss) in the prior quarter.
According to Jaseem Hasib, Vice President of S&P Capital IQ’s Global Market Intelligence, over the past 10 years, when companies have a big beat in one quarter they come back and beat again in the next quarter an above-average 75% of the time and miss only 19% of the time (in line results occur the remainder of the time).
Meanwhile, those with a big miss beat only half the time in the next quarter. S&P 500 companies are well covered by Wall Street analysts, with the median company having 19 estimates, nearly double that of a mid-cap S&P 400 index constituent. Yet, Hasib noted that unexpectedly the beat rate for those S&P 500 companies with major positive surprises was greater than the 71% rate for 400 representatives.
Before the market opens on July 16, Goldman Sachs (GS) and Schlumberger (SLB) should report EPS of $3.91 and $0.79, respectively. Last quarter, GS reported $5.94 per share, 36% above Capital IQ consensus, while SLB’s $0.89 was 19% higher than expected.
In contrast, Wynn Resorts (WYNN) and Cincinnati Financial (CINF) experienced big misses during the March quarter. They disappointed by 46% and 18%, respectively. Looking forward, WYNN is expected to post $1.11, while CINF is forecast to report $0.37 in late July. We shall see if they can rebound and beat forecasts, despite the historical coin-flip odds.
WisdomTree Earnings 500 Fund (EPS) seeks to replicate an earnings-weighted index of large-cap companies that have generated positive cumulative earnings over their most recent four fiscal quarters. The index is re-weighted on an annual basis. This ETF has a 0.28% expense ratio and $135 million in assets.