Q3 earnings season is just about through, with 491 S&P 500 companies reporting, and we think it’s safe to say firms had a rollicking good quarter. Seventy percent beat expectations, and aggregate earnings per share growth was 17.9% y/y. All 10 sectors saw higher profits, with Energy (+58.9%) and Materials (+32.1%) leading the charge. Revenues were also up across the board, with aggregate per-share growth of 11% y/y.* Overall, firms are lean, healthy and growing.
And expectations are for more double-digit earnings growth in Q4, though forecasts have been ratcheted down in recent weeks. In our view, that’s a sign expectations are likely still too dim, which suggests the disconnect between reality and sentiment should continue being a positive factor.
Here’s just one example of how detached sentiment is: As we projected, leading up to Black Friday, there were ample stories suggesting tapped-out consumers wouldn’t shop. But Black Friday was pretty smokin’ hot, according to preliminary data from a few sources. Friday sales were up 6.6% over 2010. Thanksgiving weekend sales were up 16.4% y/y, to a record-high $52.4 billion. Through noon (EST) on Monday, Cyber Monday online retail sales were up 20% y/y. “Competitive shopping” reached new heights of absurdity.
Keeping with prevailing sentiment, some posit sales only grew because some stores were open on Thanksgiving, while others opened midnight Friday. That could be a contributing factor—more hours, more shoppers—but aggregate spending per shopper still grew 9.1%. And spending was broad-based. Clothing and electronics were particularly robust, while department stores reported high demand for handbags, watches and cosmetics. Toy and sporting goods retailers reported surging sales, too.
Now, a record Black Friday doesn’t mean a gangbusters holiday season is a shoo-in. Nor should you conflate a couple days’ spending spree into any kind of forward-looking analysis. For example, some reports are quick to point out a strong Black Friday in 2008 preceded a 4% drop in holiday sales that year. But considering today’s economic landscape is far removed from then, in our view, it seems likely folks keep spending. Consider: Spending has grown nine straight quarters and is at an all-time high. Retail sales, too, are at new highs and growing. Can this continue? Some argue no, pointing to high unemployment. However, we’ve found disposable income drives sales more than unemployment does. And nominal disposable income has grown eight straight quarters, even as unemployment has remained high.
Far be it from us to argue the world is now suddenly devoid of worries. It isn’t. But a bull market doesn’t need a perfect world, only one that’s on balance better than appreciated or expected. And sharply rising holiday sales and a solid earnings season—when so many folks felt neither would come to fruition—seemingly illustrate the wide gap between reality and folks’ perceptions.
*Source: Thomson Reuters, “This Week in Earnings,” November 25, 2011.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.