Stocks: Watch the Falling Estimates

The Dow Jones Industrial Average (^DJI 0.06%) and the S&P 500 (^GSPC -0.22%) were roughly unchanged yesterday (+0.03% and -0.07%, respectively, to be absolutely precise). However, it was not a great week for blue-chip stocks, with the Dow down 1.8%.

The macro view: According to S&P Dow Jones Indices, we're more than halfway through the earnings season. We now have full comparative data for the third quarter for 275 companies in the S&P 500. Of these, 173 (63%) have beaten expectations, 63 (23%) have missed, and 39 (15%) have met their estimates. A 63% "beat" rate is in line with a historical average of 62%, according to Thomson Reuters, but it's lower than the rate over the past several quarters.

The two sectors with the highest percentage of companies beating estimates are now health care and consumer staples, while, at the other end of the spectrum, the sectors with the highest percentage of companies falling short are materials and industrials. That seems pretty consistent with a slowing economy -- mind the earnings gap! Note that the bottom-up estimate for next year's S&P 500 earnings per share, which is calculated based on consensus estimates for all the stocks in the index, has been coming down slowly, but relentlessly, over time (see the following table). I expect that trend to continue throughout this earnings season.

Source: S&P Dow Jones Indices.

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