May 19, 2022


Skillful Business Crafters

Earnings consensus estimates too low: BMO report

Earnings results continue to defy expectations, leading a recent BMO Capital Markets (BMO) report to note that the current earnings consensus is too low.

The S&P 500 (^GSPC) rose 2.9% in August, continuing seven months of increase for the index. This represents the longest consecutive winning period for the S&P 500 since December of 2017.

“Earnings results have continued to defy expectations with S&P 500 companies growing Q2 EPS by 91%, the highest clip since Q4’09,” said Chief Investment Strategist Brian Belski.

Despite worries associated with the tapering of Federal Reserve support programs, as well as the historical lack of market success during the month of September, investors remain generally optimistic.

Eighty-seven percent of the index exceeded consensus EPS forecasts, according to the report, which was the largest recorded beat rate. In the long-term, EPS trends look optimistic. “NTM EPS growth [is] tracking at 17% and our blended growth rate [is] continuing its upward course on the way to record levels.”

Accordingly, BMO adjusted their projections for year-end EPS. “We anticipate that earnings will persist in surpassing expectations through year-end, ultimately leaving consensus estimates too low relative to the actuals and near our 2021 EPS target of $210,” Belski said.

Despite the optimism on earnings in general, several areas of slow growth were identified in the report. Stocks which were designated low risk struggled in relation to the high growth technology stocks.

“Low Risk was the biggest laggard during the month, registering a 1.8% return, as all five low risk factors were unable to keep pace with the overall market despite some broad strength in Utilities,” the report found. “[The] Estimated Growth [group] also struggled on a relative basis, logging a 1.7% return with weakness in Energy and select Consumer Discretionary stocks weighing on returns.”

Consumer discretionary stocks not done yet

Despite a precipitous struggle for consumer discretionary stocks for the past several months, a brighter future may lie ahead. Since the end of April, consumer discretionary stocks have trailed the S&P 500 by 6%. Reflecting the bearish attitudes held by many investors towards the sector, consumer discretionary stocks are the most shorted on the market right now.

“Despite this weakness, we disagree with the notion proposed by some pundits that it’s time to rotate out of these names and into defensives like Consumer Staples,” Belski said in the report. “Yes, the delta variant spread looks to have put a dent in the latest consumer confidence and personal spending data, but the economic backdrop remains solid, which should be supportive of the Consumer Discretionary sector… and is exhibiting a strong recovery in ROE.”

The recent dip in the sector may bode well the future of those companies, the report explained. After year-over-year performance drops more than one standard deviation below the mean, a rebound typically occurs. “It is also interesting to note that Discretionary intrastock correlations versus the market have increased to its highest level since 2008, indicating to us that investors may not be properly differentiating among individual stocks in the sector, potentially creating buying opportunities,” the report noted.

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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