To date, 99% of the companies in the S&P 500 have reported revenues for the fourth quarter. Of these companies, 77% reported actual sales above the mean sales estimate. This marked the highest percentage of companies reporting positive revenue surprises since FactSet began tracking this metric in Q3 2008. In aggregate, revenues exceeded expectations by 1.5%, which was above the five-year average of 0.6%. Due to these upside surprises, the revenue growth rate for the S&P 500 has improved to 8.2% today from 6.7% on December 31.
Given the stronger performance of companies relative to analyst sales estimates and the improvement in the growth rate over the past two months, how did the market respond to upside sales surprises during the Q4 earnings season?
Companies in the S&P 500 that reported positive sales surprises for Q4 have seen a decrease in price of 0.4% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive sales surprises have witnessed a 1.3% increase in price on average during this four-day window.
If the final percentage for the quarter is -0.4%, it will mark the largest average price decline over this four-day window for S&P 500 companies that have reported positive sales surprises since Q2 2011 (-2.9%). It will also mark the second time in the past three quarters in which S&P 500 companies reporting positive sales surprises recorded an average decline in price over this four-day window. In Q3 2017, S&P 500 companies that reported positive sales surprises saw an average decline in price of 0.3% two days before the report through two days after the report.
Of the 384 S&P 500 companies that have reported positive revenue surprises for Q4, 219 (or 57%) recorded a decline in price over this period. The average price decline of these 219 companies over this four-day window was -4.4%. Of these 219 companies, 20 witnessed a double-digit decline in price. An example of one of these 20 companies is Stericycle. After the closing bell on February 21, Stericycle reported actual revenues of $887.8 million, compared to the mean sales estimate of $882.6 million. However, from February 19 through February 23, the price of the stock fell by 21.0% (to $60.05 from $76.02).
Why Did the Market Punish Positive Revenue Surprises During the Fourth Quarter?
In aggregate, it was not due to forward sales guidance or analyst revisions to sales estimates for the first quarter. To date, fewer S&P 500 companies have issued negative sales guidance for Q1 2018 (23) compared to the five-year average (46). In aggregate, analysts have increased sales estimates by 0.2% for Q1 2018.
The average price decline was likely due to a combination of the high valuation of the market during the month of January and the subsequent price decline of the market in early February. During the month of January, the average forward 12-month P/S ratio for the S&P 500 was 2.2. This forward 12-month P/S ratio was above the four most recent historical averages for the S&P 500: five-year (1.7), 10-year (1.5), 15-year (1.5), and 20-year (1.6). Thus, despite the number and magnitude of positive sales surprises reported in the fourth quarter, the market may have been be reluctant to push valuations even higher.
After hitting a peak value of 2872.87 on January 26, the value of the S&P 500 fell by 10.2% over the next nine trading days, closing at 2581.00 on February 8. During this period of declining value (from January 29 through February 8), 204 S&P 500 companies (or 41% of the index) reported actual results for the fourth quarter. Since February 8, the value of the index has increased by 6.1%. With this increase in value, the forward 12-month P/S ratio now stands at 2.1, which is still above the four most recent historical averages.