The stock market's most important driver hasn't looked this good in over a decade – Business Insider

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  • The stock market just went through a correction, but corporate earnings are not the reason why. 
  • In fact, according to Bespoke Investment Group, S&P 500 companies are beating estimates at the best rate in over a decade. 
  • Analysts are now hiking first-quarter earnings expectations, and it’s very unusual for a correction to start as estimates are being revised upward, said Deutsche Bank’s David Bianco. 

One thing you cannot blame the stock market’s recent correction on is corporate earnings.

Every quarter, it’s crucial that companies top analysts’ expectations for earnings per share along with demonstrating growth from the previous year. Strong earnings growth has been one of the key drivers of the bull stock market run of the last several years.

And according to Bespoke Investment Group, S&P 500 companies are on track to beat earnings estimates at a rate not seen in over a decade. More than 1,000 companies had reported fourth-quarter earnings as of Tuesday, and 70% of them had topped analysts’ consensus estimates. 

epsbeat Bespoke Investment Group

Companies are crushing it on revenues as well, with a 73.4% beat rate, the strongest since the third quarter of 2004, according to Bespoke. 

What makes this even more remarkable is that ahead of the current earnings season, analysts set an unusually high bar for companies to clear. According to FactSet, they made the smallest cuts to their estimates for any quarter since 2010. This ran counter to analysts’ prior habit of lowering expectations into earnings season, making it easier for companies to beat these lowered forecasts and giving investors more reason to bid up their share prices.

“Again, these beat rates would be impressive in any quarter, but what makes them really stand out is that analysts were hiking estimates coming into this season, and companies have still managed to beat estimates at a very high clip,” Bespoke wrote.

“So far, analysts have not hiked estimates enough!”

John Butters, a senior earnings analyst at FactSet, wrote last week that for Q1, analysts made the largest-ever increases to their estimates since data tracking began in Q2 2002.

That makes the current quarter’s earnings even more interesting to watch. It also makes the recent correction very unusual, according to David Bianco, the chief investment officer, Americas, at Deutsche Bank Asset Management. 

“Demanding valuations can exacerbate market dips and corrections, but it’s very unusual for a correction to begin as S&P EPS estimates are being revised upward,” Bianco said in a note on Tuesday. He added: “History’s experience and sector-by-sector fundamental analysis clearly shows that higher oil prices, a weaker dollar and higher Fed Funds rates are all S&P EPS positive.”