I’m a forensic accountant, so I love earnings season. Four times a year, companies release their financial and operating numbers to the public. It can be chaotic, even though you could all but set your watch to it.
It’s a regular market mover. When you hear about companies that meet, beat, fell short of failing, or, yes, cheated “expectations,” it’s all about the quarterlies. For people like me who dig through the numbers, earnings season is crucial.
We’re on the brink of the next big data release, so dive into some of the numbers with me.
Recent reports from CNBC, USA Today, and other news outlets suggest that the coming earnings season could be surprisingly strong for U.S. stocks – basically, a continuation of the market rally that began after the November election. They further assert that there’s still too much pessimism about owning stocks and that bodes well for future returns.
I’d like to use a highly technical term in response, if you don’t mind: Hogwash.
According to CNBC, earnings are up 12% versus the same quarter a year ago. While earnings may appear to be strong, they are increasingly a mirage as we enter the ninth year of this bull market.
More and more companies are resorting to “pro forma” results versus Generally Accepted Accounting Principles (GAAP). And the GAAP is widening. By 2015, GAAP profits were 25% below “pro forma” results. That’s the largest disparity since the bull market began.
Meanwhile, 75% of companies beat earnings estimates. But only 60% topped revenue forecasts. What’s more is that revenue figures can be and often are manipulated as much as bottom-line results. There are numerous ways to pull the wool over investors’ eyes and show top-line growth that’s nothing more than accounting fiction.
Although second-quarter revenue growth will certainly strengthen the bulls’ resolve, it’s the quality of that revenue growth that matters.
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