The bulk of third-quarter earnings are now in. Here are three observations that have been widely discussed: earnings fell about 15 percent from this time last year, which was better than expected at the beginning of the reporting season. More than 80 percent of companies announced earnings above analyst's expectations, but only about 55 percent of companies beat on revenue expectations. The bulk of the earnings declines were delivered by economically sensitive groups like materials and energy stocks, while the financials posted the largest gains in operating earnings. Here are three more observations which have received less attention: some amount of investor selectivity or “discretion” is returning to the stock market. Higher quality companies may be staging a comeback. The earnings surprise beat rate may be useful, but not in a way that you might expect.
A Turn for High Quality Stocks?
The beta-chasing pursued by investors this year created stark differences in the performance among individual stocks. One of the clearest places to see this was the difference in performance between lower-ranked companies based on measures of quality (mostly the dependability of operating results) and higher-ranked companies. High-quality companies have returned about half what the equal-weighted S&P 500 Index has returned this year while the very lowest quality companies have returned almost 2.5 times the index. As other analysts such as Jeremy Grantham and Mark Hulbert have pointed out, this relative difference in performance of the two groups is off the charts when you compare it to similar market rebounds in the past.
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A Turn for High Quality Stocks?
The beta-chasing pursued by investors this year created stark differences in the performance among individual stocks. One of the clearest places to see this was the difference in performance between lower-ranked companies based on measures of quality (mostly the dependability of operating results) and higher-ranked companies. High-quality companies have returned about half what the equal-weighted S&P 500 Index has returned this year while the very lowest quality companies have returned almost 2.5 times the index. As other analysts such as Jeremy Grantham and Mark Hulbert have pointed out, this relative difference in performance of the two groups is off the charts when you compare it to similar market rebounds in the past.
read the complete article
