Wall Street estimates can’t keep up with corporate results: Morning Brief

Wall Street struggles to keep up with the pace of both the recovery in markets and the real economy. Yahoo Finance’s Myles Udland weighs in.

Video transcript

BRIAN SOZZI: All right, markets are in the green on this Thursday morning as investors are riding on all sorts of highs at the moment. In fact, there's so much green on the screen, allow me to read it off to you. The S&P 500 up 6/10 of a percent, the Dow Jones up about 7/10 of a percent. NASDAQ briefly crossed 14,000, up almost 1%. Even the good old Russell 2000 is solidly in the green to kick off this trading session.

And speaking of green, Coinbase had a sizzling market debut on Wednesday. And its stock has come out of the gate strong today. Marked retail sales data came in strong on the back of fresh stimulus checks from Uncle Sam. Bank of America and PepsiCo smashed Wall Street profit estimates. And Myles, this topic on in terms of profits is where I find you in the morning brief today. Analysts just can't keep up with corporate America.

MYLES UDLAND: Yeah, I mean, look, Sozzi, we've been on this story for months now. And we've cut it every which way you can. We've talked about it from the standpoint of economists not able to keep up with economic data. So their GDP forecasts, things like that, remain too conservative. And then, obviously, on the individual corporate side, we've seen analysts for companies unable to keep up with where their results come in. On the broader strategy side, we have seen Wall Street strategists raise their S&P price targets, even since releasing their '21-- 2021 targets back in November.

We continue to see upward revisions for broad S&P 500 earnings. We just talked to Jill Carey Hall of Bank of America yesterday. They are expecting 27% earnings growth in the first quarter. And that is 6% above where the Street is. And even that number may end up coming in conservative when we get to May and June. And we can look back and say, what did companies actually earn in the first quarter?

So, that story-- and I mean, we'll probably write this again. We're going to keep writing this again, so long as estimates on all kinds of data, be it corporate or economic, are too conservative. We will continue to highlight that the trend sort of remains and the risks remain in right tail of that distribution. And Sozzi, we touched on this earlier in the program.

And I feel for analysts at a certain point because the reason that you come up with the number you come up with, let's take an individual corporate analyst. You cover consumer discretionary, right? So pick a company in that bucket. You have your estimates for the company based partly on industry trends, economic growth, and what management has previously told you. You can't just go into your model in a given quarter and say, you know what? We think they're just going to beat by 30% to what our estimates would say because that's what other people have done.

You could do that. But there's some risk in that. Now your clients are calling you, saying, why were you the only analyst who overestimated what they would earn? Why are all your peers below where company X came in, and you guys actually are telling me in my inbox that it was a bad quarter? So I feel for the analyst community that way. But at the same time, Sozzi, I mean, how many more companies do we need to see beat estimates to realize that there's something a little bit off here in how strategists are thinking through the implications of what is now breaking out as a clear V-shaped recovery in corporate America?

BRIAN SOZZI: Yeah, if you're the outlier analyst on the Street, I remember doing that a bunch of times, where just being the extreme analyst in terms of profit estimates, either high or low, high or low, you're getting a call from the management team. And your day is going to be absolutely awful. And you may not get any more management meetings for a while.

But nonetheless, Myles, I don't know what you took from our chat with PepsiCo CFO Hugh Johnston, but for me, he acknowledged that sure, they're seeing inflation. But I think why it's so hard to model things like this into earnings right now, from an analyst standpoint, they're raising prices. He said, look, we've taken some pricing actions and it's not just in the US. It's around the world. A lot of the companies don't disclose what type of pricing they take, but they're out there, taking price increases to offset their inflation. They've cut a lot of costs through their business. And it's hard to estimate those things.

MYLES UDLAND: Well, and even just as you're talking, Sozzi, pulling up the Pepsi release that's in front of me here. So the company guides to mid-single digit increase in organic revenue and high single digit increase in core constant currency earnings per share. So that's what the company has told you. I got from our conversation that Pepsi, like many companies in their basket, they're thinking about what would happen if they're looking at 10% organic revenue growth. And I think they believe they can have it both ways. They can win with the at-home trades. They can also get food service and an on-premise consumption higher. And they can indeed blow away those expectations. But the company isn't saying it officially.

So are you going to be the analyst who comes out and says, you know, my readthrough is actually they're going to double their official guidance? No, you're not going to do that. And so it puts you, as an analyst, in a bind for how aggressive you want to be and how much imputation you want to do on corporate commentary. I think that's for us, for the talking heads to say, hey, I think there might be 50% upside to Pepsi's guide. I'm not really sure, as an analyst at a securities firm X, you want to take that kind of risk.

BRIAN SOZZI: You know, Myles, one of the last points here, but this ultimately raises another question. Why are they publishing estimates to begin with? Why is this practice still OK, especially when they are, in effect, trash? They don't mean anything at this point. And then, off of that, why are earnings still being reported quarterly? Why not go to a semi-annual model?

MYLES UDLAND: All I would say is that if you anchor to nothing, then earnings are completely contextless. And I don't think that we should not have estimates, even if the estimates end up being off. I think it's good to have an anchor on some kind of expectation. And I think quarterly is not that often. I'll fight for that all day.

BRIAN SOZZI: Fair enough.