At the start of the week (23 April) Alphabet, Google’s parent company, announced its results for the first quarter of 2018. Analysts had estimated the internet company to report revenues of $30.29 billion, with earnings per share (EPS) standing at $9.28. Instead, revenue came in at $31.15 billion, and EPS at $9.93.
Typically, beating analysts’ earnings estimates sends a company’s share price north. But this time, the opposite happened for Alphabet’s shares. On the day of the results being announced, shares closed down by around 1 per cent, while since then (as of 24 April close), shares were down over 5 per cent.
Likewise, at the end of last week (19 April) Citigroup, the US bank, announced an earnings estimates of $1.68 per share, beating the $1.61 expected. Yet it is down 2.39 per cent between Friday (19 April) peak and Tuesday's (24 April) close. Similarly Goldman Sachs, also delivered the goods, with EPS coming in at $6.95, way above the earnings consensus of $5.67. Despite earnings flying past consensus estimates, the banking giant’s share price is down almost 6 per cent between its earnings announcement (17 April) and Tuesday’s (24 April) close.
These three firms, however, were not the only to smash earnings estimates in the latest quarter. According to research published by wealth management firm Bespoke on 23 April, of all firms that had reported their earnings so far, 80 per cent had beaten consensus estimates.
‘Companies have been beating EPS estimates at a historic clip so far this season,’ noted the wealth management firm Bespoke.
With only 10-15 per cent of companies reporting estimates so far, it’s not likely that such a high ratio of firms earnings beating estimates will continue. Even so, for many US firms, the first quarter of 2018 has been much better than expected.
There are number of reasons for the good performance. Firstly, US firms have continued to benefit from low interest rates – although that’s nothing new. At the same time, the world has entered a new period of strong, co-ordinated global economic growth, a boon to US large companies. And finally, the US has seen significant domestic fiscal stimulus in the form of the Trump tax cut.
Yet whatever wonder these three factors have had on US earnings, markets are seemingly more downbeat. Despite the huge number of companies (based on the number already reporting) having beating estimates, major US indices have continued to close in negative territory of the past few days.
Put simply, stock market prices are going down on the back of good news – perhaps indicating valuations have reached a top.
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