Companies are beating earnings estimates—but don’t be fooled

Getty Images A trader works on the floor of the New York Stock Exchange.

Getty Images
A trader works on the floor of the New York Stock Exchange.

Are companies beating earnings expectations? Well, yes and no.

All eyes are on earnings this week, as investors eagerly await to find out how well American companies did in the first quarter of 2014. So far, fewer than 20 percent of S&P 500 companies have reported. But already, a few disturbing trends are emerging.

Of the 85 S&P companies that have already reported their first-quarter earnings, 67 percent have beaten analyst estimates on the earnings side, and 51 percent have beaten on the revenue side, according to FactSet. That sounds pretty good—until one considers that over the past four years, 73 percent of companies have tended to beat earnings estimates, and 58 percent have tended to beat revenue estimates.

It’s not just the number of companies beating—the aggregate amount of earnings has been similarly light. Companies have reported earnings 2.0 percent above expectations, which is well shy of the 5.8 percent “surprise percentage” that companies have tended to report over the last four years.

The overall sales numbers have also been soft, with companies reporting revenue 0.3 percent below expectations in aggregate.

At this point, S&P 500 companies look to report a year-over-year earnings decline for the first time since the third quarter of 2012. By combining the earnings that have already been reported with the analyst estimates of the S&P 500 earnings we have not yet seen, FactSet senior earnings analyst John Butters arrives at a “blended” earnings decline estimate of 1.3 percent.

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“This is not a strong start to the earnings season,” Butters told “Where we stand right now, we’re seeing fewer companies beating than we’d expect, and we’re still looking at a year-over-year earnings decline.”

The key point is that just looking to see whether companies are beating their estimates is a bit myopic, given that “if we look historically, more often than not, companies do beat their estimates,” Butters said.

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That’s why comparing earning beat percentages to recent averages is so important. And right now, earnings are looking weak in that context, even despite the meager expectations.

Of course, with results still to come from 415 S&P 500 companies, we could still see a substantial improvement in the earnings picture. But investors should be careful not to view it with rose-tinted glasses.

—By CNBC’s Alex Rosenberg.

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