>US Q3 results: feel the beat (HSBC)

■ With a third of the S&P 500’s market cap having now reported, we find that the season is coming in significantly ahead of analysts’ expectations

■ 78% of companies have beaten on the bottom line, many by a wide margin; moreover, we are now seeing more top-line surprises emerging with beats here outnumbering misses by a factor of two-to-one

■ The positive news is broad-based, but technology is the standout sector, with a hugely impressive 90% of companies beating on the EPS line and 95% beating on the sales line

The US Q3 results season has so far significantly exceeded market expectations. With 35% of the S&P 500’s market cap having now reported (through Wednesday 21 October), our analysis shows that 78% of the constituent companies have provided a positive EPS surprise in the third quarter and only 12% have missed (remember on average 60% beat expectations and 20% miss).

However, it’s not just the number of companies beating expectations that has impressed, but also the magnitude of the beat – we estimate a positive EPS surprise of 21% for the S&P 500 index. And even if we exclude the volatile financials sector (where the EPS surprise stands at a huge +224%) we still get an impressive EPS surprise +12%. If we combine the figures from the companies that have reported with the consensus forecasts of those still to report, we arrive at a ‘blended’ growth rate of -23%. Note, Q3 will be the ninth consecutive quarter where EPS growth has been negative, but it is almost certain to be the last in the current cycle, with the rate set to turn sharply positive in Q4.

So what about sales? Isn’t aggressive cost-cutting the only reason companies are beating? No, is the short answer. Our analysis shows that 59% of companies have also beaten sales expectations and these have outnumbered the number missing by a factor of two-to-one.

The fact that we are now getting more upside surprises coming through at the top line is reassuringly positive for the earnings outlook and we see no reason to change our view (recently set out in Equity Insights Quarterly: upgrade cycle to continue, 6 October 2009) that the earnings upgrade cycle has further to run and that consensus expectations for 2010 earnings are too low.

We are maintaining our pro-market view and we stay pro-beta at both the regional and sector levels.

To see the full report: EQUITY INSIGHTS