As of the end of the day on Wednesday, July 23rd, one hundred eighty-six of the five hundred companies which make up the S&P 500 have reported earnings (37.2% of the total companies in the S&P 500).
Of that number, 71% have beaten analyst expectations, 9% have reported earnings that were in-line with analyst expectations, and 20% missed analyst expectations.
You may recall that we have argued against the desire of many in the media to seize on quotations such as "the biggest economic shock since the Great Depression" (which was repeated on many news channels in April of this year) and "worse than any recession we've had since World War II" (which was widely repeated by the news media earlier this month, always noting that this gloomy remark came from a "billionaire investor").
Well, earnings season so far has not cooperated with this irresponsible storyline. Companies are stubbornly growing their earnings at a greater rate than the conventional wisdom has predicted, as evidenced by the fully 71% who have so far beaten forecasts.
Some of these earnings beats are coming from fairly significant companies. For instance, Intel Corporation* reported quarter-over-quarter earnings growth of 25% -- not bad for a company in the middle of a period that has been called worse than the 1970s and the worst since the Depression. Their earnings beat consensus forecasts by three cents a share.
(The next day, two independent research companies both concluded from their analysis that PC shipments grew either 15% or 16% during the quarter, beating estimates as well. An analyst from one of the companies, who had predicted slower growth, said "We're waiting for sales to slow down.")
Yesterday, Intuitive Surgical announced earnings grew 66% year-over-year in the quarter, despite analyst predictions that the slowing economy would have hospitals tightening their belts and unwilling or unable to purchase the robotic surgical systems that are creating a paradigm shift in some types of surgery**. While the consensus had predicted earnings of $1.18 per share, Intuitive earned $1.28 per share, beating by a dime.
The naysayers will argue that beating earnings expectations isn't an absolute measure: maybe those expectations were excessively low, but that doesn't mean that companies are doing well by beating excessively lowered analyst estimates. However, that counter-argument is exactly what we are saying: the conventional wisdom has been calling for a disaster, and the reality is turning out to show that the conventional wisdom has greatly exaggerated the reports of the economy's demise. Further, the average absolute return for the S&P companies reported so far was nearly 10% as of Monday evening, according to this report from Zack's Investment Research.
We have argued that investors should pay attention to the concept of "situational awareness" in order to avoid having a mental picture that is either too rosy to match the actual situation, or too gloomy to match the actual situation. In that article back in April, we said "today, there is a widespread perception that the economy is on the brink of a cliff" but that the overall situation was actually one of opportunity, even though few investors were currently looking to future opportunities.
While many continue to declare that they are "waiting for sales to slow down," we believe that events in the coming months will continue to surprise many on the upside.
Nevertheless, we emphasize that our core strategy is based on the selective, long-term ownership of well-run growing companies through many market cycles, rather than on any scheme of calling and timing market cycles..
* The principals of Taylor Frigon Capital Management do not own shares of Intel (INTC).
** The principals of Taylor Frigon Capital Management own shares of Intuitive Surgical (ISRG).
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