November 18, 2024
This past earnings season was great, right? Well, earnings looked good because Wall Street lowered the bar.
Third-quarter earnings season started with the big banks, which largely exceeded analysts’ expectations. Naturally, that set off a flurry of positive earnings headlines that lasted a while.
But one thing the talking heads probably won’t mention is how these earnings beats were manufactured by the analyst community. See, this time around, analysts set an unusually low bar for public companies to easily hop over.
Over the last three months, Wall Street analysts have slashed their quarterly earnings estimates for S&P 500 companies by roughly 5%. Meanwhile, they’ve also significantly reduced their estimates for this year’s fourth quarter, as well as the full year of 2025.
Lowered expectations will help weaker companies earn the equivalent of participation trophies for “beating” earnings. However, actual earnings will need to be higher for investors to justify high prices – they don’t want to pay premiums for companies limping over the finish line.
As of this writing, not all companies have reported yet. But more “beats” are assuredly on their way. That said, investors won’t stick around too long in an environment where companies are rewarded simply for participation in the market. At some point, the earnings results need to actually perform, not just surpass muted expectations.