It’s “The 1%” vs Everyone Else: FAAMG Earnings Soar As Russell 2000 EPS Growth Craters

The earnings recession which lasted for all of 2019, is finally coming to an end. According to Factset, with a majority of companies reproting, the blended earnings growth rate for the S&P 500 for the fourth quarter is 0.7% as of February 7. This growth rate is above the estimated earnings decline of -1.7% at the end of the quarter (December 31).

More importantly, if 0.7% remains the actual growth rate for Q4 after all companies have reported, it will mark the first time the index has reported year-over-year growth in earnings since Q4 2018 (13.3%), and will represent an end to the earnings recession that lasted for all of 2019. As such, it is not surprising that the index is now reporting earnings growth for the fourth quarter.
This long-awaited rebound in EPS – which is mostly a byproduct of the ravenous stock buybacks unleashed by tech companies – comes at a key time, just as the world asks what the economic growth impact in China and pass-through tothe US economy will be as a result of the coronavirus pandemic.
So back to the actual earnings season, where as Goldman’s David Kostin writes, 49% of S&P 500 companies beat consensus EPS estimates by more than one standard deviation, slightly above the long-term average of 46%. The Goldman strategist observes that companies that beat EPS estimates outperformed the S&P 500 by +113 bp the day after reporting, consistent with history. However, investors punished companies missing consensus estimates; firms that missed lagged the S&P 500 by -334 bp, underperforming by much more than the long-term average of -211 bp. This suggests that with stocks priced to perfection, even modest deviations from expectations are promptly punished by the market.
Unlike Factset, which sees earnings growth of just 0.7%, Goldman’s calculations find that S&P EPS will grow by 2%, after …
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