Friday, April 27, 2007

Earnings Are Good, But Beware Comparisons

From IBD:

With more than half of companies reporting so far, analysts are looking at high single-digit year-over-year gains. That would snap the streak of 14 straight quarters of double-digit earnings growth.

But that is a lot better than Wall Street was predicting at the start of earnings season.

With fear of a slowing economy, many firms issued conservative guidance or none at all. Analysts didn't want to go out on a limb.

"People had really ratcheted down their expectations, so it was going to be pretty easy to get over," said Dirk van Dijk of Zacks Investment Research.

Back on April 1, analysts expected S&P 500 companies to deliver first-quarter earnings growth of 3.4%, said Thomson Financial.

Let's talk about expectations management. CEOs -- and all public spokespeople of big companies -- are media savvy. They understand that beating lower expectations will be a positive boost for stock prices. Hence, they will try and lower expectations in the hopes that a positive earnings surprise will increase a stock's value.

Analysts have a different fear, but one that has a similar effect: they don't want to be wrong. Hence, they will tend to be more conservative especially at a time of slowing economic growth.

These two factors are coming together this earnings season.

After all of the smoke clears from this earnings season, we're probably going to wind up where we thought we were going to wind up: High-single digit growth. This is about what we expected.

But the combined effect of conservative or no company estimates and analysts making conservative projections for fear of being wrong has lead to a bit more overall excitement this earnings season than is warranted.

In short -- we're where we pretty much predicted we would be this earnings season -- high single digit earnings growth. We just took a more emotionally charged avenue to get here.