Spate of early earnings shows that US companies are beating low expectations

NEW YORK, N.Y. – For U.S. investors, low expectations are paying off.

Over the last week, 38 companies in the Standard & Poor’s 500 index have reported quarterly results, and financial information company S&P Capital IQ says most have posted bigger-than-expected profits. Companies, however, tend to talk down expectations so they can surprise markets with higher results, and that appears to be happening again.

The market has responded, with the S&P 500 up 3.8 per cent since last Wednesday’s close, when Alcoa’s results kicked off earnings season. The S&P rose finished at 2,124.29 on Thursday after strong earnings from an array of companies.

The index closed at an all-time high on May 21 but slumped recently, weighed down by concerns about a potential default by Greece and plunging Chinese stocks. Chinese markets have now steadied and Greece and its creditors have agreed to start talking about a new bailout package that would help the country avoid default and departure from the euro.

This week, investors have turned their attention back to earnings, which are supposed to decline overall. But big banks like JPMorgan Chase, Bank of America, and Citigroup all reported gains, and distanced themselves from onerous legal costs tied to the financial crisis. Intel surpassed estimates and Netflix posted strong growth in streaming video subscribers.

S&P Capital IQ analyst Lindsay Bell thinks second-quarter profits might grow slightly compared to last year, but she says investors and analysts may ultimately look at other figures, like revenue growth, because companies have taken so many steps to boost their profits.

“A lot of the earnings growth that we are getting, as modest as it is, is coming from financial engineering” like stock repurchases, she said.

Overall, S&P Capital IQ expects revenue for companies in the S&P 500 to decline 3.6 per cent for the second quarter.


This story has been corrected to clarify the performance of the S&P 500 since last Wednesday.