Earnings season focus shifts to revenue, capex

SAN FRANCISCO (MarketWatch) — Expect a heightened focus on revenue and corporate capital expenditure spending as earnings season reaches its midpoint this week.

Last week, the Dow Jones Industrial Average (DJIA)  finished up 1.1%, the S&P 500 Index (SPX)   gained 0.9% to finish at a new record close of 1,759.77, and the Nasdaq Composite Index (COMP)  advanced 0.7% after a peak earnings week.

On the surface, results from the biggest U.S. companies appear relatively strong, and that's helped support stock gains.

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With nearly half the S&P 500 and more than two-thirds of the Dow industrials having already reported quarterly results, the current earnings season is looking to be the best of the year in terms of how companies are beating expectations. And S&P 500 earnings are on their way to setting a new record high.

"What's occurring is that U.S. corporations are benefitting from being the best house in a bad neighborhood," said Brian Belski, chief investment strategist at BMO Capital Markets. Much of that has to do with corporate America stripping away costs in a challenging global revenue environment, Belski said.

A wave of earnings beats last week significantly bumped up the percent of companies topping forecasts. After this past week, 75% of S&P 500 companies have topped the earnings consensus this season, compared with the four-year average of 73%, according to John Butters, senior earnings analyst at FactSet. Prior to last week's reports, the earnings beat rate had been running at 69%.

This will be a "Dow-a-day" week of quarterly results with Merck & Co. (MRK)  on Monday, Pfizer Inc. (PFE)  on Tuesday, Visa Inc. (V)  on Wednesday, Exxon Mobil Corp. (XOM)  on Thursday, and Chevron Corp. (CVX)  on Friday.

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Plus, more than 120 companies on the S&P 500 report next week with notable releases from Apple Inc. (AAPL) and Biogen Idec Inc. (BIIB)  on Monday; Gilead Sciences Inc. (GILD)  and Allergan Inc. (AGN)  on Tuesday; Starbucks Corp. (SBUX)  , General Motors Co. (GM) , and Comcast Corp. (CMCSA)  on Wednesday; along with MasterCard Inc. (MA)  and ConocoPhillips (COP)  on Thursday.

And Nasdaq stock Facebook Inc. (FB)  reports Wednesday.

Easier to beat

Some strategists, however, are less than impressed with earnings. Earnings beats have become a less significant metric because the results compare with lowered expectations. In late June, analysts on average forecast earnings-per-share growth for the third quarter would be around 6% year-over-year. By the time earnings season started, they had trimmed that growth outlook to less than 1%. The beats don't "seem to be all that clean," said Tobias Levkovich, chief U.S. strategist at Citi Research, in a recent note.

"Moreover, a good number [of companies] have made or topped forecasts on lower than expected tax rates or one-time items, suggesting that results were not necessarily comprised of high quality beats," Levkovich noted. "Accordingly, it is challenging to argue that the reporting season has been all that good when some detailed insight is applied."

RBC Capital Markets Enlarge Image The average quarterly earnings surprise.

Also, corporations giving outlooks for the fourth quarter continue to be negative, which places pressure on analysts to lower their estimates. About 86% of fourth-quarter earnings outlooks (49 out of 57 companies on the S&P 500) have been negative, meaning the forecast falls below the current Wall Street consensus, according to Butters. Over the past five years, on average, about 63% of companies giving a quarterly earnings outlook provided one that's below the consensus.