Picture a relay team of 500 runners.
Two of them just posted a world record split.
The other 498 jogged their leg.
Add up the team’s overall time, and you would swear you just watched history.
That is the trick this earnings season is playing on you.
Analysts started the quarter expecting the “Magnificent Seven,” Wall Street’s seven largest tech stocks, to grow earnings 30.8%.
Today, with most of the group’s numbers in, the estimate is 118.5% – nearly four times the original forecast.
Impressive? It should be.
Real? Not quite.
You see, two of those seven stocks are doing almost all of the sprinting.
If you pull Google parent Alphabet (GOOGL) and Amazon (AMZN) out of the Mag 7, then growth for the remaining five drops to 43.2%.
That’s still a sizable beat over the 36.5% analysts expected back on June 30. But it’s nowhere close to a world record.
The other 493 stocks in the S&P 500 had their growth estimate jump from 20.7% to 31.8%. A solid improvement. Not a sprint.
The point is, two stocks are carrying this earnings season on their backs.
Everyone else is having a decent, unspectacular quarter.
That gap, between the headline number and the number underneath it, is exactly what our earnings scanner hunts for.
Every week, it scans the earnings calendar and flags two groups: companies whose numbers are set up to beat big, and companies whose numbers are set up to disappoint.
Here’s what it found this week…
“Bullish” Earnings to Watch
These stocks are expected to beat their earnings per share (EPS) from the previous quarter. And if those expectations are met or exceeded, they could potentially trade higher.
For this screen, stocks must meet four criteria:
- 10 or more analysts cover the stock.
- The average analyst recommendation is a “Buy.”
- It BEAT analysts’ EPS estimates for the previous quarter.
- The average analyst estimate for the current quarter’s EPS is greater than the previous one.
Here are five companies that made this week’s list:
Adobe Inc. (ADBE) tops the list, and it’s worth understanding why.
The company reports next Thursday, September 10, and its estimate assumes real strength: $6.08 a share, up from $4.26 last quarter.
Behind that figure, Adobe’s Firefly AI tools crossed roughly $300 million in annual recurring revenue last quarter, up about 50% in three months.
Its broader AI-first products more than tripled year over year, reaching past $500 million in annual recurring revenue.
Adobe did that while deliberately holding off on Creative Cloud price increases, instead flooding the market with free tools. Its free Creative Cloud user base jumped 70% in a year up to 90 million people.
That’s the bet behind the estimate.
Adobe is trading short-term pricing power for a much bigger funnel of future paying customers. If the AI products keep converting at this pace, it will be evident in Thursday’s earnings report.
Oracle Corp. (ORCL), Core & Main Inc. (CNM), RH (RH) and SailPoint Inc. (SAIL) round out the bullish list.
Each shares the same setup: an estimate meaningfully higher than what the company posted last quarter.
Now, let’s look at next week’s bearish earnings calls…
“Bearish” Earnings to Watch
For our “bearish” earnings screen, we’re only looking for two things:
- 10 or more analysts must cover the stock.
- The average analyst estimate for the current quarter’s EPS is less than the previous quarter’s.
We want companies that are covered by a sufficiently large group of Wall Street analysts who collectively expect the company to report a quarter-over-quarter (QOQ) decline in earnings.
Here are three companies that passed this screen:
Kroger Co. (KR) is the one worth watching most closely, and the estimate tells the story before the company even reports: $1.05 per share, down 28% from $1.46 last quarter.
Three things explain that drop.
Kroger just narrowed its full-year identical sales guidance to 2.8% to 3.0%, a soft number compared with its own five-year average of nearly 3.8%.
Pharmacy reimbursement rates are working against it, a headwind the company has flagged directly.
And Kroger runs on a structurally thin 3.3% operating margin, which leaves almost no room to absorb a bad quarter.
Kroger also has a new CEO. Greg Foran took over in February, and Wall Street likes his focus on store execution and cost control.
But a new CEO cleaning house has every incentive to guide conservatively now and look good later. That’s baked into this estimate, too. Kroger isn’t due to report again until early December, which gives you time to decide what to do before the print.
Moving on, AeroVironment Inc. (AVAV) and Chewy Inc. (CHWY) round out the bearish list, both flashing the same warning sign: an estimate meaningfully lower than what the company posted last quarter.
Now, here’s what I would do with all of this…
Don’t let a 118.5% headline talk you into blindly chasing earnings season. That number belongs to two stocks, not the market.
Pull up your own portfolio’s earnings dates this week. If you’re holding Kroger, AeroVironment or Chewy into their next report, tighten your stop now, before the print, not after.
If you’re holding Adobe, Oracle, or Core & Main, this is a hold-through-earnings setup, not a sell-the-news one.
One reminder: The market is closed on Monday for the Labor Day holiday, so enjoy the extended weekend.
Until next time…
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, What My System Says Today
