Superficiality

You’ll often hear a pundit make the comment that “earnings should be strong” for this sector or that market. It’s meaningless absent the context of expectations. If earnings are strong, but the market expects them to be strong, then this pronouncement has not only zero value for the listener, but probably negative value. This sort of superficiality is good for cocktail party chatter or television prattle, but it doesn’t actually make anyone a dime.

Energy stocks in the second quarter offer a great illustration of this. Energy are the worst performing sector in the S&P 500 this year and especially during the second quarter, during which they seemingly declined every week.

Here’s a performance chart by sector beginning at the end of Q1 through Friday, Energy is in black:

Disgusting.

Now let’s take a look at the earnings estimates for the second quarter – these earnings reports are just starting to trickle in now…

If you were overweighting a portfolio based on which stocks were poised to delivery “strong earnings”, you would undoubtedly be overweight the worst performing stocks in the whole market. Have a look at this past quarter’s expected / reported earnings growth – that giant bar towering over the rest of the sectors on the left is Energy:

Via Factset:

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) year-over-year earnings growth rate for Q2 2017 is 6.5% today. On June 30, the estimated earnings growth rate was 6.6%. Nine sectors are reporting or are predicted to report year-over-year earnings growth, led by the Energy, Information Technology, and Financials sectors.

It’s important to be able to differentiate the outlook for a sector or market vs the expectations investors already entertain about it. This is obviously the hard part, which is why there is money to be made for a very select group of folks who happen to guess right about this from time to time.

If I had told you, at the start of Q2, that the S&P 500’s Energy names were going to put up earnings growth of almost 400% for the coming quarter, light years ahead of what every other sector was about to report, you may have inferred that this would lead to profits in holding the stocks.

It doesn’t work that way.

The market had already priced in the EPS recovery for the Energy sector far in advance of the second quarter and was already selling these stocks down on concerns of the recovery being largely reflected.

Remember this the next time you hear about the outlook for something being “strong” or “weak” or whatever. On the tip of your tongue should always be the rejoinder “Yes, but ‘strong’ relative to what?”

 

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. bitcoin era commented on Oct 01

    … [Trackback]

    […] Find More Info here on that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]

  2. 온라인홀덤 commented on Oct 16

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]

  3. 호박티비 commented on Nov 29

    … [Trackback]

    […] Find More to that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]

  4. click over here now commented on Nov 30

    … [Trackback]

    […] Information on that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]

  5. Regression Testing commented on Dec 20

    … [Trackback]

    […] Find More on that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]

  6. Best Place To Buy Guns Online commented on Jan 12

    … [Trackback]

    […] Read More here on that Topic: thereformedbroker.com/2017/07/10/superficiality/ […]