Broker Check

Follow the Money

| April 24, 2023

We’re nearing the heart of earnings season. This is when investors “follow the money” on first quarter corporate earnings and revenue reports, along with corporate guidance for future quarters. Of course, everything depends on the bottom line profits a company can deliver. How are things going so far?

Let’s first focus Tuesday, April 18, because 14 major companies across different industries announced earnings results that day. Seven reports came before the trading day began:

  • The Goldman Sachs Group Inc. (GS)*
  • Bank of America Corporation (BAC)
  • The Bank of New York Mellon Corporation (BK)
  • Lockheed Martin Corporation (LMT)*
  • Prologis Inc. (PLD)
  • Johnson & Johnson (JNJ)

Six of those beat their bottom-line earnings estimates – that’s an 86% beat rate!

After trading closed, seven more companies announced earnings results:

  • Netflix Inc. (NFLX)
  • United Airlines Holdings Inc. (UAL)
  • Interactive Brokers Group Inc. (IBKR)
  • Omnicom Group Inc. (OMC)
  • Metropolitan Bank Holding Corp. (MCB)
  • Intuitive Surgical Inc. (ISRG)
  • Western Alliance Bancorporation (WAL)

Four of those beat earnings expectations.

In total, 10 of the 14 companies that announced earnings results did better than expected. That’s a 71% beat rate, which falls in line with historical standards (more on history in a bit). 

One day alone doesn’t make an earnings season but stepping back to examine all earnings announcements as of this writing, we can see April 18 was not just a blip on the radar. The entire S&P 500 is off to a strong start so far – so much so that the number and magnitude of the earnings surprises are outpacing their 10-year averages. Per FactSet, 90% of the companies that have reported have shown actual earnings per share (EPS) results above estimates, which beats the 10-year average of 73%:

It certainly helps that companies and analysts previously cut EPS estimates, effectively lowering the bar. But as we saw with earnings from 2022’s fourth quarter, current earnings are not as bad as feared. The cuts and subsequent current beats are a nod to effective corporate management. In aggregate, FactSet showed companies are reporting earnings 7.9% above estimates, besting the 10-year average of 6.4%.

Perhaps most surprising is the performance of financial companies. Despite the recent banking crisis, finance firms have contributed heavily to earnings performance.

Furthermore, five of the 11 sectors that reported are expecting year-over-year earnings growth. That’s led by the consumer discretionary and industrial sectors, which are cyclical growth sectors:

While we’re currently seeing year-over-year earnings declines in most sectors, the earnings growth data lends more credibility to the thought that investors are looking to the end of this year and beyond for market upswings. Analysts also expect earnings growth for the second half of 2023.

The current beats and future guidance point to a “better than feared” environment, indicating an earnings trough now with growth down the road. The third quarter’s projected earnings growth is currently at 1.9%, while the fourth quarter’s sits at 8.8%, according to FactSet.

This all supports our base thesis of an upswing later in 2023.

Our readers know we regard earnings above all else. Thus far, markets have fared better than anticipated, and it’s due to the earnings surprises.

Switching focus to the latter part of the year, investor cash piles continue to build, which indicates patient investors are waiting to pounce. Obviously 2022 was tough. But as we showed last week, many macro worries are easing this year:

This is also reflected in MAPsignals’ trusty Big Money Index (BMI), which is a 25-day moving average of “big money” stock buys versus sells. The BMI is once again rising, having lifted from its near-term low in March, which indicates a reinvigorated appetite for stocks for institutional investors:

This coincided with slowed selling, causing a shift in the data. So, if the BMI is rising, some stocks must be under accumulation. If that’s true (and we’ll show you why we think it is), it indicates a trend shift from just a few big technology companies lifting the market-weighted S&P 500.

Digging deeper shows data-based support for a broadening market. As you can see, from April 7-20, 83% of all “big money” buys were in smaller companies ($50 billion or less in market capitalization):

That’s an about-face from earlier this year. These moves also show a much healthier, broader tone to the market overall.

While hindsight is 20/20, such moves shouldn't be too surprising given these stocks’ attractive valuations overall. Compared to the market cap weighted S&P 500, smaller stocks are cheap. The 12-month forward price-to-earnings ratio of the S&P Small Cap 600 is just 13.4-to-1, which is vastly cheaper than the S&P 500’s P/E of 18-to-1:

Once again, patience rewards investors. Opportunities like this tend to come when most people and the news least expect. The earnings information covered earlier supports the undervalued nature of these forward P/E ratios.

This opportunity for more breadth in the market, unlike in the first quarter, is healthy support for the rest of the year. That’s why this earnings season inflection point is so important from a valuation standpoint. We can see further support in the current MAPsignals sector leadership, which reflects strong cyclical growth (i.e., discretionary, technology, materials, and industrials):

To close, we want to point out how, even in seemingly difficult times, there is reason to be optimistic in the U.S., as was pointed out in The Economist recently:


This is what drives the small, innovative companies being bought up right now. It seems those lamenting the end of America’s dominance are wrong. Facts and data say otherwise. Thus, the lesson is clear to investors: don't give up on America; keep investing in homegrown companies.


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*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

*Cornerstone Financial Services, LLC owns Goldman Sachs (GS) and Lockheed Martin (LMT) directly in managed client accounts.

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC.  Cornerstone Financial and CoreCap are separate and unaffiliated entities.