5 Things You Should Know About This Earnings Season

4/10/2017


Every earnings season matters. From the middle of the first month after quarter-end to the middle of the second month, corporate results and guidance command investors' attention, often shoving otherwise important business news into the background.

We won't try to predict how the market will react to first-quarter results. But below we'll present a few key points to consider as earnings season approaches.

1) Thomson Reuters projects 10% earnings growth for the S&P 500 Index in the quarter, which would be the strongest in 22 quarters and higher than fourth-quarter growth of 8%. Back at the start of the year, the consensus called for first-quarter profit growth of 13.8%, which means expectations have eroded — as usual.

In recent years, we've usually seen estimates fall during the quarter, then actual results surprise to the upside, a trend likely to repeat for the first quarter as well. Of course, solid profit growth from the S&P 500 doesn't guarantee a strong stock market — but it would be a good start.

2) So far, 79 S&P 500 stocks have provided negative guidance for the first quarter, versus 29 releasing encouraging news. At first glance, the preponderance of negative announcements looks like a bad sign, but as the old adage says, good news can wait, while bad news must be delivered immediately.

The ratio of negative-to-positive guidance is 2.7-to-1, in line with the long-run average. Relative to historical precedent, this quarter's bad news isn't all that terrible.

3) Analysts expect broad-based improvement. The consensus projects higher profits for all 11 S&P 500 sectors, though six of them are expected to deliver less than 3% growth. Estimates project double-digit growth for the huge and influential financial and technology sectors, as well as for materials. Slow growers include consumer discretionary, consumer staples, health care, and utilities.

4) While aluminum maker Alcoa ($34; AA) isn't the bellwether it once was, the company's longstanding practice of declaring results early has established it as the unofficial starter of earnings season. This year, Alcoa will release results on April 10. Later that week, big financials including J.P. Morgan Chase ($86; JPM) and Wells Fargo ($55; WFC) will announce their earnings.

After the banks, earnings season traditionally begins to heat up, with announcements for the largest U.S. companies peaking in the last week of April and the first week of May. Of course, the stream of earnings never really slows down, as smaller companies and firms with April quarters tend to release later in the cycle. However, we can expect at least two-thirds (and probably closer to three-fourths) of the S&P 500 to release results by the end of the second week of May.

5) Overreactors will come out in force. Yes, earnings are important. However, every earnings season we see some stocks fall sharply on marginally bad news, then bounce back. Shrewd investors pay attention to results but don't make knee-jerk decisions, particularly on the sell side.

Here at the Forecasts, we usually prefer to take a day or so to digest the results. That strategy allows us to analyze rather than just react, and also leaves open a window for new information, either from the company or from other analysts, that provides context on the raw data.

The waves can get rough during earnings season, with news breaking left and right and stock prices darting around like fish trying to escape from a shark. Stick with us, and we'll help you navigate safely. Keep up with results using our Earnings Tracker, available in the Subscriber Area of www.DowTheory.com. We provide the Earnings Tracker every earnings season, updating results for recommended stocks as they hit the market.


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