The media loves a soundbite – especially an unambiguously positive or negative one. Such and such earnings report “beat the Street” or “gave a weaker than expected outlook” will always do in a pinch – the article/segment practically writes itself.
But there is something going on this earnings season that is not so Prêt-à-Porter for a headline. While the beat rate is high, so is the earnings warning rate for Q2. And stocks are acting negatively in the aggregate to earnings beats anyway – perhaps because the possibility of record profit margins without robust growth in the economy is a fantasy.
Here’s Steven Russolillo at MarketBeat with the stats:
The beat rate has been extraordinarily high this quarter. About 81% of S&P 500 companies that have reported earnings this season have exceeded analysts’ expectations, which would be the highest “beat” rate on record, according to Thomson Reuters.
But a chart from Zero Hedge highlights how the situation may not be as rosy as it appears.
So far this quarter, share prices have fallen in the days after a company reports better-than-expected earnings and revenue. The data show a decline of 1.2% on average in the three days after an earnings beat.
And companies that have beaten earnings, but missed revenue estimates are averaging a 2.6% decline throughout the same three-day time frame.
“High beat rate + low expectations = so what?” quipped Josh Brown, a financial adviser at Fusion IQ. “The earnings beat rate means little in the absence of hot guidance, which we’ve certainly not gotten in the aggregate.”
Corporate guidance has been less than stellar this quarter. There have been 83 negative earnings warnings for the first quarter, compared to 30 positive preannouncements, according to Thomson Reuters.
This is nothing to panic about, but it should be used to check excess bullishness – the simple fact is that on the earnings front, we’ve pushed margins to the limit and the market now understands this.