Why So Many Companies Smashed Estimates This Quarter

Nearly 90% of S&P 500 companies topped earnings estimates for the second quarter, the best performance in five years.

What was behind that outperformance? A number of factors, including cautious guidance from CEOs, a pre-Delta-variant recovery from the coronavirus pandemic, and lapping last year's lockdown, among other reasons. In an episode of The Five, recorded on Aug. 23, Fool contributors Jeremy Bowman, Brian Withers, and Toby Bordelon break down those drivers and others.

Brian Withers: Nearly 90 percent of S&P 500 companies have topped consensus earnings per share estimates. This is the highest it's been in the last 20 quarters. Question to the group. Why do you think companies are beating earnings at record-high rates, and what's one company that you follow that beat their earnings this quarter and why? Toby what you got for us?

Toby Bordelon: I think part of this has to do with perhaps consumer demand being higher than the people anticipated. I think a lot of analysts, even a lot of companies with their guidance perhaps were being a little cautious going into this year, because we weren't quite sure what it was going to look like. We weren't quite sure what coronavirus will do, we weren't quite sure what the reopening would look like. We didn't know what that would mean for consumer habits and how people would spend their money. As it turns out, people actually do have a lot of cash on hand. It seems that they're ready to spend it. They're making up for lost time. I think the labor shortage is putting pressure on wages to use that might be helping with spending, putting more money in people's pockets. You talked about a specific company, Bumble (BMBL 1.67%) which makes online dating apps similar to Match Group and stuff they got going on. But a little bit of a different focus, newly public. In their first public quarter, which I think they announced earnings couple of weeks ago, we talked about this maybe two weeks ago, they beat expectations. People out there having fun maybe, been locked up for a year and want to get out dating more. The beat wasn't huge, so I think this might just be that issue of analysts being a little more cautious, especially with a new company, not quite sure what to expect. But yeah, good job for them.

Jeremy Bowman: Yeah. I agree with what Toby said. I think this is a combination of uncertainty, just about the recovery from the pandemic, and investors and analysts are in the dark here, if usually you compare year-over-year performance, Q2 last year was a disaster with the lockdowns and stuff. I think there's that factor. I think consumers have cash, like Toby said, the stimulus in March, spending has been up. Second quarter was really the first time that people got to go out or be out and about getting the vaccine and all that. We saw a strong performance in discretionary categories like restaurants, apparel, and travel, certainly relative to pandemic levels. One company that topped estimates worth noting is Facebook (META 0.14%), which I think is a barometer for the overall consumer. The consumer and small businesses make up most of their customer base. Small and medium-size businesses spending on ads. On the platform, they had revenue up 56 percent at $29.1 billion, that beat estimates at $27.8 billion. Earnings per share doubled, also beat estimates. To me that is a sign that that they count on businesses really getting back to spending on ads and trying to get those customers back in the door.

Brian Withers: Yeah, that's certainly a great forward-looking trend that companies are coming back. I know that The Trade Desk also saw some bounce back in the most recent quarter as companies are loosening their purse strings. As retail opens up and people get out. I'm thinking that part of the reason that companies are hitting their earnings above consensus estimates is management had to be conservative coming into this quarter in predicting how their business was going to do. The factoid that I shared with you, it's all about earnings. Not only is it revenue, but potentially companies were holding back on spending, and then consumers came out faster than we expected, and since they were holding back on expenses, most of that a lot of that upside dropped to the bottom line. Certainly, a positive thing and you guys talked about pent-up demand and people getting out. I think this is a bit of a one time thing and may not continue. We've talked a little bit about on the show about supply chain disruptions and its ability to potentially even to extend into the holiday season. This could possibly turn the other way in a few months. Just my crazy prediction. But a company who has beat earnings, coming into the quarter was Atlassian (TEAM 1.42%), ticker symbol TEAM. This is one of my favorites that I've talked about. They are cloud software company focused on team-based collaborative platforms, and getting co-workers to work together in lots of different software modules to make that happen, and it shows me that their land and expand strategy is working, and their sticky ecosystem is still sticky. One of the big things that Atlassian is going through right now is they're moving customers who are on-premise, have bought their product in the past and they have installed it on-premise, and they're moving over to the Cloud. The Atlassian management put the predictions together, expecting as they did this transition, that they would lose some portion of their customers. It's possible that they aren't losing customers at the rate they predicted. That's certainly very positive and Atlassian got a big tick up in, I think it was 20 percent plus the day after earnings were announced. I still think these guys got a long way to go and as I continue to being excited about them as a company.