The stock market has certainly been rewarding bullish investors this year, and the third-quarter earnings reports have been adding their support: Since the start of the earnings season on Oct. 8, the S&P 500 has risen 6.5 per cent.
Admittedly, there is more going on here than just earnings. Washington ended the government shutdown that had been weighing on the market, providing some relief. And economists have been lowering expectations for the start of Federal Reserve tapering – seen as a done deal as recently as September – suggesting that full-on stimulus will continue through the end of the year, at least.
But against this backdrop, earnings have been surprisingly upbeat. According to Bank of America, 57 per cent of companies within the S&P 500 have beaten expectations with their earnings-per share, 50 per cent have beaten sales expectations and 38 per cent have beaten both yardsticks.
"This is an improvement from the previous week and better than what we saw at the same time last quarter," said Savita Subramanian, Bank of America's equity and quant strategist, in a note. "Beats are additionally now trending above average, when historically 35 per cent of companies have beaten on EPS and sales."
The reason for the better-than-expected results is also positive. Rather than earnings being boosted by cost-cutting or expectations being pushed down by overly cautious estimates, the reason this time is a better-looking underlying environment. "Companies across sectors have continued to cite improving or stabilizing trends in Europe and mixed trends out of China and emerging markets," Ms. Subramanian said.
There are standouts. Materials, technology stocks and health-care stocks have shown the most impressive "beat" rates so far. Not that investors are making much of a distinction. Since the start of the third-quarter earnings season, all 10 sectors within the S&P 500 are up – and there isn't a lot of space between them. Industrials lead, with a gain of 7.7 per cent. Utilities are at the the bottom, with a gain of 4.5 per cent. Tech stocks are in the bottom half.
According to Howard Silverblatt, senior index analyst at Standard & Poor's (via The Wall Street Journal's MoneyBeat), 451 stocks within the S&P 500 are in positive territory in 2013 – a 90 per cent success rate that is on track to be the second-best performance since 1980 (and just seven stocks out of the top performance, in 2003).
"Chasing returns is not a good reason to invest, but when enough do it, the short-term impact is more buying and higher prices, which we may be getting close to if the market stays anywhere near its current level," Mr. Silverblatt said.
Some strategists are staying quite cautious. David Kostin at Goldman Sachs said on Friday that the S&P 500 will likely "hover around current levels through year-end" and rise to 1,850 within the next 12 months – implying a gain of about 6 per cent, which lags expectations for Japan (15 per cent) and Europe (9 per cent).
He argues that the S&P 500 trades at fair value now, which means that its path is dictated by profit growth rather than a significant expansion in the earnings multiple. He estimates the S&P 500 will generate earnings of $108 (U.S.) a share in 2013, rising to $116 a share in 2014, for a gain of 7.4 per cent. Beating expectations is very nice, but actual earnings are growing only moderately.