From Morgan Stanley:
We are publishing the first earnings season monitor for 1Q results. We’ve tracked earnings data for 113 companies so far, or 15% of market cap. Although still early days in the results season, 5 conclusions from results so far:
1) Earnings season has kicked-off to a very strong start as the breadth of surprises is currently the strongest in a decade…With the first of three busy weeks for results now complete, European earnings have so far delivered a very strong set of results. 43% of companies have beaten consensus estimates by 5% or more, with just 20% missing. This gives a net beat of 23% of companies. Although we would expect this figure to moderate as earnings season progresses, a net beat of 23% of companies would place 1Q17 results as the best quarter in a decade. Weighted earnings have beaten by 5.6% and the median stock has beaten estimates by 2.9%. It is still relatively early in the quarter, and only 4 sectors have seen more than 10% of market cap report (Energy, Financials, IT and Industrials) and so far they have all delivered a strong set of earnings results.
2) … and the breadth of revenue beats is currently the strongest ever on 14 years of data To date we have seen 58% of companies beat revenue estimates by 1% or more, while just 17% have missed. The 41% net beat is the strongest on record with data going back to 2003. Weighted revenues have beaten by 3% and the median stock has beaten estimates by 1.5%.
3) Earnings are on track to grow close to 20% year-on-year in 1Q… We remain bullish on the European earnings outlook, seeing 16% growth for full-year 2017 earnings against consensus at 14%, driven by an improving macro backdrop, higher commodity prices year-on-year, rising margins and a recovery in financial earnings. 1Q is likely to be the peak quarter for year-on-year growth given base effects and tougher comps, but the results season has shown very strong growth so far. Europe is on track for earnings growth of 19%, with the median stock growing 14%. Revenues are also tracking at 13.5% growth and the median stock is seeing 7% top-line growth.
4) … as the consensus upgrade cycle continues The breadth of Europe’s earnings upgrades is currently at the strongest level since 2010, and as illustrated on page 5, the earnings revisions ratio is currently in positive territory for Cyclicals, Defensives, Financials and Commodities. Year-to-date 2017 EPS estimates have been upgraded by ~1%, compared to the average downgrade of 5% usually seen in the first 4 months of the year.
5) The relatively muted price reaction to results suggests a reasonable degree of earnings optimism is already in the price Page 9 shows the relative performance of stocks on the day of results, based on whether they beat or missed estimates on a range of metrics. Looking at both earnings and sales, stocks that have beaten estimates have, on average outperformed the market by around 1%. However, misses have generally been punished by more than beats have outperformed. When companies have missed revenue estimates they have, on average underperformed the market by 3.4% on the day of results, while earnings misses have underperformed by 2.2%. While 1Q earnings season does show more evidence of the strong earnings recovery that we expect, the price reaction would suggest that a reasonable degree of earnings optimism is already in the price, at least in the near-term.
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