MARKETS SPECTATOR: Upside surprise

First-half earnings show the highest upside surprise bias in seven years, according to Goldman Sachs.

Goldman Sachs has released a report looking back at the current earnings season and how it’s panned out compared to expectations.

Ahead of the reporting season, the bulk of analysts and brokers were very worried that the results were not going to be able to justify the recent run-up in prices. However, results have generally been pretty solid and largely supported prices.

Goldman Sachs notes that overall, with 70 per cent of stocks under its coverage and 86 per cent by market cap already reported, upside surprise bias has been the highest in seven years versus the brokers' expectations. Results have beaten Goldman’s expectations by 2.6 per cent versus a long-term average of 1.5 per cent.

However, despite the strength in headline numbers and slowdown in downgrades, Goldman said analysts have only upgraded EPS estimates for 21 per cent of companies versus EPS downgrades for 37 per cent of stocks. The largest upgrades have come from the steel, infrastructure and utilities sectors, while downgrades have been biggest in the gaming and consumer staples sectors.

In terms of dividends, they have surprised on the upside with 30 per cent of companies announcing dividends ahead of Goldman’s expectations. This has been very important in the current climate of generationally low interest rates and where those stocks with high sustainable dividends have been re-rated by income seeking investors, such as SMSFs.