Weekly commentary on recent stock market action, with a particular focus on technical analysis.
Scott L. Wren, Senior Global Equity Strategist
The Market Won’t be Paying Much Attention to Second-Quarter Earnings
- We are moving into the thick of the second quarter earnings reporting season. The poor year-over-year comparisons have been expected by market participants for quite some time. The probability of a big overall surprise one way or the other is small.
What it may mean for investors
- Look ahead, not behind. We see improvements in the economy that will lead to better earnings performance over the balance of this year and in 2017.
This week we are moving into the thick of what will certainly be a disappointing second-quarter earnings reporting season. Consensus expectations are calling for a year-over-year decline of approximately five percent, but our work suggests the contraction will be only a little less bad at around four percent. And of course, when looking at calendar-year 2016 as a whole, we are expecting earnings to be only slightly higher than they were last year. In other words, whether you are looking at the second quarter or for all of 2016, there is not much to get excited about.
Or is there? After all, the S&P 500 just set a new all-time record high. Somebody must be excited about something. But this strategist urges you to keep things in the proper perspective. Earnings season attracts a ton of attention from the media. But in a very modest-growth economy that features low inflation, actual results for most companies will usually not differ much from company guidance. In this type of environment, most individual-company analysts have an easier time confirming the guidance their companies are giving out. Sure, there will be the usual big positive and negative surprises coming from a relatively small number of individual companies but not so much from the overall market. Remember that company guidance nearly always leans toward the conservative side (especially after events like “Brexit”). That is why, quarter after quarter, it is common for 65 percent to 70 percent of companies to beat the consensus “Street” estimate.
In terms of garnering investor attention, the second-quarter earnings reporting season has a couple of things working against it. First, investors have known for at least nine months that the first half of this year was going to be a poor one in terms of overall earnings performance. Energy sector earnings have been, absolutely as expected, a disaster. They have pulled down overall earnings growth for the S&P 500 by a meaningful amount. And secondly, as we remind our readers at least once every year, corporate earnings are a lagging, not a leading, indicator.
Earnings do not give investors a look at what is going to happen in the future. Quarterly results merely tell the story of what happened in the very recent past. This strategist looks at the current earnings reporting season as more of a process of confirmation. Second-quarter earnings are confirming that our outlook for the economy has been on target; the below-trend growth pace we have been expecting is indeed playing out. As we have pointed out many times in numerous cycles, this is not the end of the world. As one can see, stocks can do well in a modest-growth environment.
The key theme for investors to latch onto at the present time is that the market is looking ahead and expecting improvement. That is why, in our opinion, the S&P 500 has recently set new all-time highs. We are projecting better earnings performance and faster economic growth in this year’s second half and, especially, next year. So do not get caught up in the current earnings season hype; it’s a backwards look. The future appears brighter. And that is why the market won’t be paying much attention to second-quarter earnings.
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