Market and Earnings Season Update
Over 700 companies have reported earnings so far this season. As of Friday 4/25, 61.1% of all U.S. companies had beaten consensus earnings estimates, which is just slightly below the 62% from last quarter and is consistent with the rate we’ve seen during the current bull market.
When earnings season began, top line revenue estimates were relatively weak, but have improved over the last five days. Currently 55% of the companies reporting have beaten estimates, up from 50% last week.
The two prior charts show that so far, things are looking decent during this reporting cycle, but nothing to get giddy about. The big change this quarter, and it is decidedly something to get giddy about, is guidance. The past 10 quarters companies have given the markets pretty grim forward outlooks, with a negative guidance spread, meaning more companies lowering guidance than raising, in each of the last 10 earnings seasons. This season we finally see a positive ratio.
Last earnings season investors bought aggressively during the season, despite the negative outlooks. This season the opposite appears to be occurring with the average company falling 0.39% on its reporting day. Companies that beat estimates are not rewarded all that much, rising an average of 0.13% while those that miss are falling 0.52%.
Last week the market was a condensed version of what we’ve been experiencing for much of the year, a great deal of whipsaw back and forth action that hurts sentiment more than actual portfolios. The market closed Friday 4/25 at nearly the same place it was on the close of Thursday the week prior, (markets were closed on April 18th in observance of Good Friday). The much maligned Nasdaq is now about 6% off its recent cycle high while the S&P500 is 1.4% below its recent April 2nd high of 1890.9. If we go a bit deeper we find that while corporate earnings reports are painting a sunnier picture, stock prices have been struggling. Last weekend Barron’s pointed out that the average stock in the S&P500 has fallen 12.5% from its peak. The average consumer discretionary is down 16%, despite some positive March retail sales data. Internet stocks are down 18% on average with biotech, the darling of 2013, down 25%. The average large-cap has lost just under 9% with small cap falling nearly 16%. We’ve been warning for months that stocks have been richly priced, so while the fundamentals appear to be improving, prices are moving in the opposite direction, falling off their heady highs. For those who read these posts regularly, this will come as no surprise.
That being said, the majority of country stock markets are still above their 50-day moving average, including the U.S. which is just keeping its neck above water at 0.3% above this key support level. If we take a broader six month look, the S&P500 and the Dow 30 have been fairly consistently moving above their 50-day moving averages, so while it’s been painful, the longer-term uptrend remains in place. Small caps are a different story, with both the Nasdaq 100 and Russell 200 below their 50-day moving averages, where they have been for over a month. Nasdaq internet stocks are well below their 50-day moving average and still losing ground.
Bottom Line: After last year’s blow away market that greatly outpaced growth in underlying earnings, we are unsurprised to see some consolidation in prices. So far we see the longer-term upward trends holding firm for the more value-oriented firms that we tend to prefer. We’ve seen the usual reversal of last year’s highest fliers become this year’s dogs, in yet another example of why it doesn’t pay to chase returns.
