With Q3 earnings season nearly over, investors are cheering corporate earnings: even applauding companies that fall short of expectations or signal next quarter won't be as rosy as previously thought.
Why it matters: Investors' renewed optimism that's pushed stock prices to all-time highs is giving businesses more leeway than in the past.
- Profits on a per-share basis are still on track to drop 1.2% year-over-year — though, as more reports come in, that figure has improved from initial estimates that had forecast as much as a 3% fall in earnings.
- “Expectations were low for some of the sectors exposed to the overall economy and trade. Some of those fears have really subsided, creating a good quarter,” James Ragan, an analyst at firm DA Davidson, told the WSJ.
By the numbers: S&P 500 companies reporting fatter profits than what analysts expected have seen average share prices pop 2.3% days before and after their report — above the five-year average of 1%, according to FactSet.
- As for corporations that unexpectedly disappoint, those share prices have fallen an average of 1.5%, less than the 2.6% that stock prices have dropped on average in the past five years when companies missed estimates.
The bottom line: Investors' glee for just-OK earnings is a shift from the year-ago period. On-edge investors then weren't rewarding the slew of companies that exceeded analysts' profit expectations.
- Those stocks saw no price change on average, while companies reporting worse news than expected saw an average price decrease of just 3.2% — way above the five-year average price decrease.