Profit Surprises Fail To Impress


First-quarter reporting season has been a mixed bag, with mostly better-than-consensus earnings failing to generate widespread enthusiasm. But the major averages have advanced since earnings season began, and the Dow Industrials and Dow Transports are within 1.7% of this year's highs. Closes above those highs — 13,264.49 in the Industrials and 5,368.93 in the Transports — would reconfirm the bullish primary trend.

Managing expectations

For the more than 150 members of the S&P 500 Index that have reported March-quarter results, nearly three-fourths have exceeded consensus profit estimates. Total per-share profits for the index are now expected to be up 6.3% from year-earlier levels, versus the 3.2% expected on April 1 and 5.5% expected on Jan. 1, according to Thomson Reuters.

So far, the percentage of S&P 500 companies exceeding consensus profit estimates is near the record high reached in 2009 — and well above the norm of 62% since 1994. Yet, with some notable exceptions like Apple ($610; AAPL), investors have been mostly unimpressed. The average share-price gain for companies exceeding consensus profit estimates is less than half the norm since 2009.

In part, investors are responding to decades of expectations management. Companies have become so focused on managing expectations that profit surprises are no longer surprising. Managements were especially aggressive about lowering guidance in the March quarter, with negative warnings outnumbering positive warnings by a nearly 3-to-1 ratio.

Also, estimates for the remainder of 2012 have moved little, suggesting analysts are not convinced first-quarter results signal a better-than-expected environment. According to Thomson Reuters, the consensus now projects year-to-year earnings growth for the S&P 500 Index of 9.7% for the June quarter and 6.2% for the September quarter — up marginally since April 1 but down since Jan. 1.

Finally, March-quarter results have been reported amid renewed fears regarding the European debt crisis. While last year's worries of a global meltdown in the credit markets have abated, worsening indicators for European economies are weighing on expectations for global demand.


A breakout above 13,264.49 in the Industrials and 5,368.93 in the Transports would signal that the majority money opinion remains bullish, while a failure to surpass those levels would signal some uncertainty regarding the primary trend. For now, our buy lists have 90% to 93% in stocks.

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