This articles was submitted by Louis Basenese of
as part of our
Nearly a month ago - when aluminum giant,
), officially kicked off earnings season - I shared two key metrics
we should be focusing on: the earnings "beat rate" and the guidance
Now that roughly 70% of the companies in the S&P 500 have
reported results, it's time for a checkup before we head into the
As you'll see in a moment, there's good reason to proceed with
caution and pick your investments wisely.
See the full Trefis analysis for Alcoa here
Struggling to Be Average
Longtime readers are tired of me saying this, but it's a proven
fact that stock prices ultimately follow earnings. Or, more simply,
as long as companies are producing more and more profits, stock
prices are likely to charge higher.
That's what makes the earnings beat rate - a measure of the
percentage of companies beating analysts' expectations for profits
- such a useful indicator. It quickly tells us the financial health
of the majority of the companies in the S&P 500 and the
likelihood the index is going to head higher.
So what's the latest reading telling us?
Well, at 61.5%, it's not exactly an overwhelmingly bullish sign.
Truth be told, it's barely average. Since 1998, the historical beat
rate averages out to 62%, according to Bespoke Investment
A silver lining
exist, however. The beat rate is trending higher. Two weeks ago, it
stood at a bull market low of just 57%.
But don't get your hopes up too much. The strongest rallies
occur when the beat rate tops 65%. Since more than half of the
companies in the S&P 500 already reported results, it's
unlikely we'll top that key threshold this quarter.
Don't Bet on the Spread
As I noted last month, past results don't matter as much as
expectations for the future. Why? Because the stock market is a
forward-looking animal. Which is where the guidance spread comes
It measures the difference between the percentage of companies
raising guidance and the percentage of companies lowering guidance.
A positive spread indicates that more companies are optimistic
about the future. And a negative spread indicates that more
companies are pessimistic.
The latest reading checks in at -3.3%, which means more
companies are lowering guidance than raising it. More so than last
quarter, too. In the third quarter the guidance spread checked-in
Here again, a silver lining exists, as the guidance spread is
improving. Last week, it stood at -4.2%. And it's nowhere near the
lows hit during the throes of the financial crisis at around
So how should we interpret the less-than-inspiring results this
earnings season? Simply put, we need to choose wisely.
Even though stocks are collectively cheap - trading for about 14
times earnings, on average - a rising tide is no longer going to
lift all boats. Case in point: We haven't experienced a single "all
or nothing" day yet this year.
An "all or nothing" day is defined as a day when at least 400
stocks in the S&P 500 all move up or down in price. In 2011, we
witnessed a record number of all or nothing days (70), with the
majority occurring in the second half of the year. Six weeks into
2012, though, we haven't experienced a single one. That's a
definitive change in trading behavior.
As I told you on Friday
, we're clearly in a stock picker's market. And the latest earnings
season stats underscore the need to choose wisely. I recommend you
stick to companies reporting solid earnings growth and raising
guidance for future quarters.