A Miamian may tell you the beach is just too cold in February. But try telling that to the millions who visit the city around that time each year in order to escape winter. In the end, a 68-degree beach day is measured relative to the weather at home, wherever that may be.
Relativity should also be considered when looking at the financial results of America's biggest publicly traded companies. Before the second-quarter earnings season began, profits at Standard & Poor's 500 index companies were forecast to fall 5.5 percent compared to the same period a year earlier. Nope. So far, it turns out the second quarter wasn't that bad. In fact, earnings of those companies are down less than 4 percent versus last year, according to FactSet.
Down, yes. But not as bad, right?
Long-term investors know there are two ways to judge a company's financial performance: the absolute figures and the relative results. Relative to what? Relative to what financial journalists incorrectly call consensus expectations. There is no consensus, per se. There is a range of predicted results from financial analysts.
This is how financial results are judged initially. And so investors can see "better than expected" results and think a company's business is "better than expected." (To be clear, the data for the second quarter is more accurately described as "not as bad as feared.")
This has helped push the stock index to record highs. But these earnings results may not provide a stable bedrock for long. Profits are down. Stock prices are up. This is not a sustainable pairing.
Dozens more S&P 500 companies release second-quarter financial results in the week ahead. If earnings continue to decline _ no matter how small _ compared to a year ago, it will be the fifth consecutive quarter of lower profits. While the results may be judged as relatively good, there's no escaping that earnings have cooled.
