"Better-than-expected" has been a common theme this earnings season and key driver to Friday's morning advance. Of the 178 S&P 500 companies to have reported earnings thus far, 67% have reported an upside earnings surprise, according to Bloomberg.
But there's a dark-side to the story, according to Diane Garnick, investment strategist at Invesco, which has over $350 billion of assets under management.
While the majority of companies are beating earnings estimates, many are missing on the revenue side, Garnick notes. That suggests the bottom-line "beats" are mainly the result of cost cutting rather than top-line sales growth. Wall Street's focus on short-term results may be satisfied by these "better-than-expected" results, and companies have an incentive to do more layoffs because the savings flow directly to the bottom line. But cutting costs is not the basis for a prolonged period of strong earnings, Garnick says.
It's self-evident, but when companies lay people off, those former employees reduce spending sharply, meaning less economic activity and lower sales for their former employees. Results from Microsoft and American Express, as well as Amazon.com's guidance, provide evidence of these trends -- even as shares of all three firms rally sharply.
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