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By Jeremy Glaser and Robert Johnson, CFA | 11-12-2014 11:00 AM

Surprise: Earnings Turn Out Better Than Expected

A few high-profile misses notwithstanding, earnings were statistically strong last quarter, with potential for steady, if somewhat slower, growth looking ahead.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Nearly 90% of U.S. companies have reported third-quarter earnings. I'm here today with Bob Johnson--he is our director of economic analysis--for his take on the quarter and also for what investors can expect for earnings going forward.

Bob, thanks for joining me.

Bob Johnson: Thank you for having me, Jeremy.

Glaser: You described this quarter to me as kind of an odd earnings season earlier. What does that mean? What do you mean by it being odd?

Johnson: Statistically, it was a great earnings quarter. You hear some of the data on the popular companies and you might say, "That's crazy--what I'm hearing is not so good." So, that's the dichotomy. Let me start, first, by talking about the company comments a little bit and what's going on. Obviously, Amazon (AMZN), Netflix (NFLX), IBM (IBM), Kohl's (KSS), Macy's (M), all disappointed and all big-profile, popular names. So, certainly, it hasn't been necessarily a great quarter. And when I went back and looked at the FactSet numbers, I was actually kind of surprised that we've done as well as we have statistically.

Glaser: So, how many companies did beat estimates?

Johnson: It was about 77% this time, and that's the highest number we've had since 2010. So, that's really very impressive. The number typically is pretty high. It's between 68% and 72% or so, but this one is really a pretty large upside surprise percentage. Each percentage is a little bit smaller, which means probably that the economy is evening out a little bit. It's not just one thing doing great, which is probably good news.

Glaser: Is this just the fact that expectations were just too low or are companies actually doing a little bit better?

Johnson: I think they actually are doing better. I think the earnings number this quarter--that is, the third quarter, I should say--looks like it will be about 7.7%. As recently as Sept. 30, they thought the earnings growth in the third quarter would be as low as 4.5%, so we've pretty dramatically outperformed. But as you mentioned, it's a little bit of game. Companies try to talk down their earnings right at the end of the quarter, so they can have a nice little upside surprise. So, usually, the nadir of the earnings-growth rate is on the last day of the quarter--in this case Sept. 30. And I think there was certainly a little bit of that going on, but the number overall is pretty good.

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