First Quarter Earnings Recap
Just over 2,500 companies reported for the March quarter with 60% of companies posting better-than-expected earnings results, which is 2% below the average quarterly beat rate since 1999 and is well below the beat rate from the last quarter. This is now the fourth consecutive quarterly year-over-year declines in earnings since Q4 2008 through Q3 2009.
Top-line revenue beat rate was 53.8%, which is the strongest beat rate in the past five quarters, but is still well below what we’ve typically seen in years past. The drop in revenue came in -1.5%, which is actually worse than the -1.0% drop projected however at the end of March.
Looking at the movement of the S&P 500 index versus the earnings for companies in the S&P 500, we can see that the market’s movements have been based on multiple expansion, which simply means that with earnings falling, the amount investors are willing to pay for each dollar of earnings has been increasing for the market to even stay at roughly the same levels.
The good news though, (drum roll please) is that guidance is finally positive! Ok, so that may be a wee little stub of green in the chart at right, but it is still an improvement as more companies raised guidance than lowered this reporting season – finally!
Bottom Line: Looking back at prior periods of earnings recessions, we see that from 1986-1987 the S&P 500 experienced six consecutive quarters of negative earnings without the country experiencing a national recession. From late January 1986 through to the market’s peak in August 1987, the S&P 500 gained 65%. By mid-October it had of course lost about 1/3, but nevertheless, an earnings recession clearly doesn’t guarantee a crashing stock market. However, this time we find ourselves searching for any reasonable catalyst to propel valuations higher. The reality is that today monetary policy has become relatively ineffective for getting the economy moving along with more vigor – negative rates in Japan have done little and arguably have cause greater weakness. The problems are primarily structural in nature, which means that to the degree they can be addressed, it will be political, and in the middle of a highly contentious and polarized election cycle, uncertainty rules. This is likely to be a market that ebbs more than flows, so patience and risk management need to be front and center.
