If US companies are not exactly riding for a fall this earnings season, they have been set some mighty high barriers. Last week’s price action saw companies such as General Electric and Bank of America produce results substantially better than official published estimates, only to suffer sharp falls – even before the news about the Goldman Sachs fraud charge spurred a wider sell-off.
Post-Goldman, with nerves suddenly on edge, the 135 S&P 500 companies that report results this week provide a critical test of the recovery.
Eye-catching percentage increases in earnings over the past year will not be difficult, as last year’s first quarter was awful. For what it is worth, Thomson Reuters finds that earnings are expected to be up by 39 per cent (or 29 per cent if financials are excluded). If these forecasts are right, then earnings multiples are not particularly demanding. That helped drive pre-Goldman optimism.
Revenue growth is a more meaningful test, as it gives evidence on the broader economic recovery. Stripping out energy companies, whose top lines will benefit from the resurgence in oil prices over the past 12 months, the forecast is for a distinctly manageable 7 per cent growth. Some 77 per cent of S&P constituents are expected to log some revenue growth.
Companies failing to meet expectations on the top line – such as GE at the end of last week – could get clobbered. More to the point, there would be much to fear if the numbers did not substantiate a picture of corporate America moving from retrenchment and cost-cutting to a real expansion. Markets have driven ahead in recent weeks on optimism that a second “dip” in the economy can now be avoided. Renewed top-line growth is needed to validate that story.
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