Earnings Revisions – Predicted Stocks Would Fall

Earnings Scout chart on earnings estimate revisions versus the S&P 500 did a great job of forecasting the volatility in October.

I always put various economic and stock market-related research into my articles. It gives readers an understanding of the bullish and bearish arguments.

And it helps you see in real time which analysis worked and which analysis failed.

As you can see from the chart below, there was an increase in negative revisions and a decrease in positive revisions late in the summer.

Shortly afterward, stocks peaked. I showed this chart in an article over the summer. Thus proving there was no data manipulation after the fact to make it look correct.

Obviously, the next step in reviewing this chart is to see where stocks will go in November. As you can see, the S&P 5000 has fallen near the winter lows. Negative guidance has fallen, and positive guidance has risen.

Based on the guidance changes, stocks are a buy right now. However, not as much of a buy as they were in February. Also, the sell signal was stronger this summer than last winter. There were more negative revisions in September than January. I will review 2 important earnings trends in this article.

Earnings Revisions – Sharp Earnings Multiple Compression

First, it’s important to recognize that earnings have grown from the last sell off until now. Whether you choose to look at trailing or forward earnings multiples, stocks are cheaper now. They’re actually lower than they were at the February low even though they are higher now.

As of Friday, October 26th the S&P 500 was nearly flat for the year which means there has been sharp multiple compression.

The table below shows the operating and GAAP EPS growth rates for S&P 500 firms. It shows since Q1 2015 on a quarter over quarter basis and a year over year basis.

As you can see, year over year operating EPS was up 26.79% and 26.68% in the first two quarters of this year. GAAP EPS growth was 20.25% and 26.06%.