Alaric Securities celebrates at Nasdaq MarketSite
January 24, 2024 | Issue 50

Earnings Season Simplified

Nikolay Stoykov
Managing Partner at Alaric Securities
Earnings Season Surveillance: Eye-close on financial data, symbolizing meticulous monitoring for informed insights

Why You Shouldn’t Lose Sleep Over It

It’s earnings season, and many investors are anxious about the results. However, as the Wall Street Proverb states, markets tend to either climb the wall of worry or slide down the slope of hope. This means that it’s hard to predict how the market will react to earnings reports.

Now, here’s the question: Is all this stress and unpredictability worth losing sleep over?

S&P 500 Earnings per Share – A 30-Year Historical Perspective

Thanks to Yardeni Research, we’ve got our hands on a 30-year historical chart detailing the Revenues and Earnings per share for the S&P 500 index.

The quarterly earnings, currently standing at 58.62 for Q3 in 2023, are highlighted in red. Simultaneously, the historical quarterly revenues, amounting to 468.65 for Q3 in 2023, are visually represented in blue.

Yardeni S&P500The first observation is that revenues are pretty predictable, almost non-volatile, and generally trending up. Earnings, on the other hand, could be volatile but not always so.

While there have been only three recessions in the last 30 years, earnings appear volatile during a recession. For example, in the Global Financial Crisis of 2008, if the economy was not in a recession, earnings could be volatile but not exceptionally so.

So, given that the US economy was not in a recession in Q3 of 2023, one should expect Q4 of 2023 not to be a disaster.

Yes, earnings for the S&P 500 in Q4 of 2023 can be volatile, but history suggests that unless the economy is in a recession, one should choose to sleep instead of climbing the wall of worry.

Positive Surprises – Debunking the Earnings Season Myth

Another fact that supports our thesis of sleep over sleepless nights is the statistics of the proportion of companies that surprise positively versus those that surprise negatively.

Again, courtesy of Yardeni Research, we have that graph as well:

Surprised? Generally, at least 70% of companies in the S&P 500 beat expectations, sometimes as high as 80%. How do we then reconcile this “benign” graph with the volatility exhibited by the earnings of the S&P 500?

Very simple. Earnings are volatile, but the expectations for what earnings will be ahead of earnings season tend to be spot on! Yes, some companies do miss their earning, and some really surprise positively. However, expectations generally tend to be more conservative than what actually occurs.

So, even in a recession and at the peak of the Global Financial Crisis, most companies – over 60% of the S&P 500 constituents beat their estimates in Q4 of 2008!

Steadfast Performance – S&P 500 ETF (SPY) Over 30 Years

It would then appear that if an investor is properly diversified in an ETF like SPY, earnings season, and any earnings season, there should be nothing to worry about. It would appear that expectations, on average, even in extremely bad environments, tend to be always exceeded.

Earnings seasons tend to be volatile. But they are volatile only for the individual company stocks that report.

Statistics say that a well-diversified portfolio of stocks like SPY ETF (S&P500 Index) should experience little volatility during that season attributable to earnings reports.

Yes, an important constituent missing their earnings can be painful, but history says that, on average, companies in that index will beat earnings practically every quarter.

No exceptions in the last 30 years!

Disclaimer

The articles, podcasts, and newsletters from Alaric Securities OOD solely represent the authors’ views affiliated with the company. They do not represent the perspectives of Alaric Securities OOD or any of its subsidiaries or affiliates. They are provided for informative purposes and do not constitute recommendations for or against purchasing or selling security. Digital assets (such as cryptocurrency) or other assets in any account. They are neither research reports nor meant to be the foundation for any investing decisions. Any third-party information given does not represent the views of Alaric Securities OOD or any of its subsidiaries or affiliates. All investments carry risk, including the potential loss of principal, and past success does not assure future success.