Earnings Season: There’s a Surprise Hidden Behind All Those Surprises

From the WSJ's Corporate Intelligence blog:

It’s no secret on Wall Street: If a company’s earnings aren’t beating analysts’ estimates, or at least matching them, something is wrong.

That’s one reason the second quarter is looking encouraging — not because companies are beating estimates, but because of how they’re doing so.

About 70% of S&P 500 companies have managed to beat analysts’ earnings estimates in the past quarter, says Eric Slover, U.S. equity strategist at Barclays.

That is the same rate as prior quarters even as the economy has struggled, but there is one important difference: In the past, analysts’ forecasts have trended downward ahead of earnings announcements, likely thanks to feedback from the companies. As a result, companies beat expectations even when results were so-so in absolute terms.

Over the prior four quarters, estimates fell an average of 6% in the run-up to earnings season, and in the first quarter of this year, estimates fell an average of 7.5%.

In the second quarter, estimates declined on average about 3.5% ahead of earnings season....MORE