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Courtesy Zebra
Roughly 90% of
S&P 500
second-quarter earnings “prints” are in. And, since the past is prologue, what just happened can tell investors a lot about the recent rally and what to look forward to in coming months.
The second quarter was supposed to be peak pandemic pain. It was. U.S. GDP fell 33% year over year. Analysts braced for the worst, but earnings came in much better than expected. The Street simply got too bearish.
Earnings were bad, falling 9% year over year, but companies exceeded earnings estimates by an average of 23%.
Companies beating estimates, in aggregate, isn’t a surprise. Companies—and analysts—like to set the earnings bar low. The pain from missing estimates, in Wall Street terms, is far greater than the euphoria from beating estimates. But 23% is huge.
In the second quarter of 2019 the average earnings “beat” was about 5%. Earnings growth, back then, was positive.
The S&P 500 was up 4% over the same span in 2019, less than the 6.5% gain during earnings season this year. That is despite better earnings growth. Expectations are a big deal on Wall Street.
Along with analysts getting too bearish. Investors learned it is good to be a technology company. Earnings growth at tech was positive year over year even with the economic pain felt across the globe.
Tech companies in the S&P 500 grew earnings by a meager 1% year over year in the second quarter. Utilities managed to grow earnings by 9%. Earnings for industrials plunged 31% year over year, but analyst were especially bearish about the second quarter for these companies. Industrial companies ended up beating estimates by 60% on average.
Apple
(ticker: AAPL) is Exhibit A for big tech. Analysts expected earnings to fall year over year. They grew, by about 18%, and the stock is up about 19% over the past month.
Zebra Technologies
(ZBRA) is an example of the industrial trend. Earnings fell 20% year over year, but beat analyst expectations by 6%.
It wasn’t as big a beat as other industrials. But the stock is still up 11% over the past month—better than industrial peers. The reason? Technology of course. Zebra is investing in software-based solutions for retail, health care, and logistics end markets. The company bought Reflexis Systems during the second quarter.
“They are leaders in [retail] store execution software and workforce management,” Zebra CEO Anders Gustafsson tells Barron’s. “The last three acquisitions have been software acquisitions. Two-thirds of our engineers are software engineers.” Recurring—software-type—sales now make up about 20% of sales. The balance is traditional, industrial hardware.
Even industrials want to be tech companies these days.
Barron’s recently wrote positively about Zebra believing that the trend toward automation in Zebra end markets is being accelerated by Covid-19.
In the
Dow Jones Industrial Average,
27 out of the 30 companies have reported numbers. That is 90%. The themes are the same. The companies have beaten earnings estimates by 13% on average. Earnings growth, however, has been down 14% year over year.
Both metrics are a little worse than the S&P 500. The Dow is up 6% over the past month, lagging behind the S&P 500 by about 0.5 percentage points over the same span.
Earnings season turned out pretty good. Looking ahead, earnings estimates are rising for the third quarter.
As long as the outlook keeps improving, stocks can keep working. At least until next earnings season.
Write to Al Root at [email protected]
