Market Insight: Earnings Season

Earnings season is just around the corner, with reports trickling out until the action starts week beginning July 15th. However, companies have already warned that this earnings season could be worse than even the pessimistic analyst forecasts.

According to information from FactSet, 77% of the 113 companies that have issued earnings per share guidance have warned that their figures are likely to be worse than analyst estimates. The report revealed that the number of S&P 500 companies issuing negative EPS guidance for Q2 is the second highest since 2006. The worst was in the first quarter of 2016, which saw 92 negative such warnings.

Against continuous rallying from Dow Jones and the best June for S&P 500 since 1955, this is a challenging circle to square. While markets are sluggish and trade tensions are having an impact, equities remain attractive.

Earnings also declined by 0.29% in Q1, so it’s likely to become an earnings recession. There have been rumblings of recession for a while now, but markets remain fixated on the Fed and are not pricing in bad news.

Neil Wilson, Chief Markets Analyst for MARKETS.COM said: “The problem for bulls from here is that several rate cuts by the Fed are already priced in, meaning, in the absence of a material rerating of valuations, we would need to see an improvement in earnings to push equities higher still.

There are therefore two big risks coming up: The Fed doesn’t cut as expected (even one cut this year won’t be ‘enough’), and two, corporate earnings guidance is significantly weaker than the market expects.”

What to expect from Earnings Season

Aside from some early releases, earnings season really gets going on July 15th and wraps up around mid-August. So, for three weeks, traders need to keep a close eye on the market and their assets to ensure they’re making the most of the volatility.

While estimated earnings fell by 2.6% for Q2, this decline is smaller than the five-year average (-3.3%), however the volume of companies issuing negative guidance is higher than the five-year average by some margin (77% to 70%).

Specifically, certain industries have issued more negative guidance than others with Materials and Industrials sectors leading the decline. Freeport-McMoRan, DuPont and Mosaic all recorded a decrease in their mean EPS estimate of more than 10%, while in industrials the decrease was led by Boeing, 3M and American Airlines.

Perhaps surprisingly, the Energy sector recorded the largest increase in expected earnings growth for the quarter, led by Chevron.

With a gloomy outlook for the global economy and the ongoing trade tensions, traders are unlikely to be surprised by a grim earnings season. But all eyes are on the Fed today as market participants hold their breath for a rate cut. While corporate earnings don’t directly impact policymakers, reduced earnings based on a weaker economic outlook and trade worries make a rate cut (or two) look more likely.

Jay Powell is giving his semi-annual testimony later today, and the minutes from the last FOMC meeting are published tomorrow, so traders could get some insight into where the Fed is looking.

Wilson sums it up by saying: “Expectations for earnings are low but may not be low enough. Forward earnings guidance for the remainder of the year may face downward revisions, which would drag on equity markets. However, with little else out there in terms of yield and bonds looking pricey, equities may still appeal as central banks drive investors towards risk. Over to Mr Powell…”