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Friday, April 30, 2021
Analysts have never been this far behind the curve.
On Thursday, results out of Caterpillar (CAT), McDonald's (MCD), and Domino's (DPZ) — in addition to Amazon's (AMZN) report after the bell, though big tech beating estimates is almost a foregone conclusion — all topped expectations.
Caterpillar's results are a great example of just how far away from expectations results have become. Levered to the strength of the global industrial economy, Caterpillar sells expensive gear that requires a certain confidence from buyers about what prospects for demand look like. Buying a backhoe is not like buying a Peloton: you've got to really know you're going to use it.
So to see Caterpillar report revenues that were almost 10% higher than forecast shows how large the disconnect is right now between both what Wall Street is forecasting and also what companies themselves are willing to say confidently about their business. Neither analysts nor executives, in other words, are leaning into the re-opening boom.
And while it seems that almost every earnings story has sort of followed this same arc, data also confirms that this is not just our imagination: corporate earnings have never been this far out of line with expectations.
Data out of the team at Refinitiv published Thursday showed the rate at which companies were beating estimates and the magnitude by which they were beating expectations through Thursday morning's results were the best on record.
Some 86.8% of S&P 500 companies reporting results beat Wall Street forecasts and are doing so by an average of 23.5%. Both are the largest ever recorded gaps, according to Refinitiv's data, which dates back to 1994. Overall S&P 500 earnings growth is currently on pace to total 44.7% in the first quarter, which would be the best in over a decade.
We can, of course, debate the merits of formulating a forecast for a company's results each quarter. It is also important to note that many companies pulled guidance during the throes of the pandemic and haven't quite updated their thinking.
And what companies do or do not say about their outlooks helps in a big way to inform the estimates formulated by analysts. As we noted last year, the pandemic left many in the investment world flying blind. Only now is the fog starting to clear. It thus comes as little surprise there are some growing pains as visibility into the corporate world's future is regained.
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