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Q2 Earnings Provide Solid Market Foundation

As the market ebbs and flows based on the headlines, the real news coming from Q2 Earnings is that companies continue to post impressive results. More than halfway through earnings season, Factset is reporting that among the companies that have already reported, more than 83% of S&P 500 companies beat their estimates. This is an historic pace of earnings beats!

  • > 83% of Companies are beating estimates
  • > Earnings are growing 21.3% Year over Year
  • > Revenues are also growing … 9.3%

There have been some legendary disappointments. Facebook and Netflix announced some disappointing results, and there stocks lost double digits. One interesting fact: Facebook missed by a penny, and Netflix actually beat earnings, but missed on subscriber growth. It doesn’t take a terrible miss to cause panic in a stock. These companies are headline grabbers, and have given investors the false impression that Q2 is not as strong as it really it is.

This phenomenon is by investors who expect stocks to beat earnings, and beat with a bigger margin than in the past. Stocks that don’t beat earnings are punished more severely although even there it is on the low side. In fact, it is no longer just earnings, companies need to beat all relevant measures. The flip side is that companies are being rewarded when they do have a good earnings report. This quarter, companies are moving up by 1.5% which is significantly higher than the average of 1%. Here is a great chart from Factset Earnings Insights:

It is also important to remember that companies came into Q2 with a very high estimate bar to jump over. The year over year growth for S&P 500 companies was 20% by analysts estimates. The fact that 83% of companies are beating this high metric is a testament to how solid this quarter is.

Which sectors stand out?

Energy continues its resurgence with another great quarter. Caution is warranted as they have a very low quarter a year ago to compare with. Telecom also looks good, but again the results are a little misleading due to all of their acquisitions. Technology, which is growing at 23% is a rock star. All seven subsectors show growth including semiconductors which is growing at a robust 45% growth rate.

In summary, the quarter continues the trend of strong earnings reports. Revenues, earnings, and guidance all are going in the right direction. There will always be noise when a big name falters, but in general, this is a great quarter.