Bernstein's Q3 Earnings Scorecard: S&P 500 Companies Overperforming On Earnings, Underperforming On Revenue

According to Ann Larson of Bernstein, 88 percent of S&P 500 companies have reported their third-quarter results (through November 11). Of those that have reported, 79 percent reported an in-line or better-than-expected earnings print. From a historical perspective, the analyst noted that only 79 percent of companies manage to beat or meet analysts' earnings expectations.

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Meanwhile, companies are "struggling" to report a better-than-expected top-line, as only 44 percent of companies that have reported their third-quarter earnings managed to meet or beat revenue estimates. This also happens to be "significantly" below the historical average of 55 percent, and the lowest seen since the third quarter of 2012.

This Quarter's Numbers Thus Far

"Earnings estimates were reduced, while sales had been revised up till the beginning of Q3 earnings season, which could partially explain why the earnings beat percentages have been more impressive than on the top-line," Larson wrote.

Larson also pointed out that, on average, companies who missed estimates saw their stock fall by 3.2 percent within five days. On the other hand, companies who beat (or met) estimates were "rewarded," but with a "smaller" magnitude of 0.7 percent gain. This indicated that investors "were more sensitive to downside risk in earnings growth."

Pair Trade Strategy

Larson suggested that a "simple strategy" of buying stock that met or beat on both earnings and sales, while shorting companies that reported a miss on both the top and bottom line led to a return of 5.9 percent.

Naturally, this is a hypothetical example, as it is unfeasible for investors to successfully identify every winner and loser. Nevertheless, the strategy "demonstrates how stocks have been rewarded or penalized this earnings season."

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