Aggregate earnings and guidance

What this actually is

Four times a year, public companies report what they actually earned and say what they expect next. Over long periods a stock market is simply corporate profits multiplied by whatever investors are willing to pay for them; earnings season is where the first half of that equation gets updated.

Why it matters to a person

Guidance moves prices more than results, because results are history. A company that beats last quarter and cuts next quarter usually falls. In aggregate, whether the other 493 companies in the index are growing decides whether a rally can broaden beyond the largest few.

For scale

Roughly 75% of companies beat estimates in a typical quarter, because estimates are guided down beforehand — so a beat rate of 75% is neutral, not good. S&P 500 earnings fell about 15% in 2008–09 and about 30% in 2020, and recovered faster both times than forecasts implied.

How to read a release

The mechanism

Over long horizons the market is earnings times a multiple; the multiple is sentiment and rates, the earnings are this.

What to watch: S&P 500 EPS growth; beat rate; revisions. Arrives quarterly; the effect typically lasts months. Impact tier 1 — Regime-setting: Moves everything and sets the direction for months or years. These are the discount rate, the level of earnings, the availability of credit, and the shocks large enough to stop the economy. If one of these turns, nothing else in the list matters much.

Primary source — insight.factset.com ↗