The US Q2 results season has significantly exceeded market expectations. With less than 10%
of the S&P 500’s market cap to report, our updated analysis shows that around three-quarters
of the constituent companies have provided a positive EPS surprise in the second quarter
(remember on average 60% beat expectations). And it’s not just the number of companies
beating expectations that has impressed but also the magnitude of the EPS beat – we estimate a
positive EPS surprise of 14% for the S&P 500 index.
The better than expected outturn has limited the fall in the year-on-year EPS growth rate
to 29% versus the consensus forecast of a 36% fall going into the season. In our view, this
indicates that there is substance behind the equity market rally seen over the last month.
However, the bears aren’t convinced and argue that the only reason companies are beating
expectations is because of cost-cutting. We have two comments on this. Firstly, at this stage in
the economic cycle, with US GDP down to a post-war record of 3.9% year-on-year in Q2, this
wouldn’t be a particularly surprising outcome. Secondly, where is the evidence that this is the
case? Many commentators have used the ‘it’s all down to cost-cutting’ line rather loosely in
our view and have provided very little in the way of factual evidence.
In response, we fill the gap by undertaking for the fist time a detailed analysis of the
revenue line. What is particularly interesting about our findings is that the positive EPS
outturn is by no means just a cost-cutting story, with the number of S&P 500 companies
beating sales expectations (at 49%) exceeding the number missing (at 41%). Of those that
beat on EPS we find that exactly half also beat on revenues. At the sector level, we find
that Financials are leading the way with 67% of companies beating on revenues.
In our view, these results support our pro-market stance and we continue to see equity
markets higher by year-end (refer to Equity Insight: From virtual to reality, 24 July 2009
for further detail on this view). We stay pro-beta at both the regional and sector level