Back in the bad old days of 2001/2002, earnings seasons was a source of endless angst and despair. Analysts had been excessively optimistic in their expectations for corporate revenues and earnings a long, long time; That inappropriately cheery outlook bore painful fruit. On top of all that, the profit drop made already stretched valuations look even worse.
Oh, and the expectation that the “Goldilocks” economic environment would persist into the indefinite future? That ended with a dull thud during the Bear market also.
During those early days of the crash, disappointments were commonplace. When a stock got punished, however, it never died alone: Its entire sector was taken out back and shot; The market as a whole shuddered every time any market leader tripped. The atmosphere was like watching a train wreck in slow motion. Eventually, we reached the point where traders and investors alike simply did not want to hold equities through earnings season. The pattern of selling before the earnings news, only to buy stocks back later – and cheaper – had become fairly entrenched. It is plainly visible on the weekly charts from that era.
This quarter, an entirely different blueprint is emerging. Even companies with good quarterly earnings numbers – those that meet expectations – are getting punished. This represents a sea change in investor expectations. Meeting the number has become a given; Failing to exceed shareholders expectations – as opposed to merely disappointing investors – is now cause for a severe drubbing. Investors have become so used to good numbers, and that represents a major shift in market sentiment.
The difference between then and now is in the impact of the earnings season on the overall market. Instead of an IBM or a Johnson and Johnson mangling the major indices, we see instead a small wrinkle within their sector. The rest of the market has been making modest adjustments quite nicely.
That represents an enormous difference between the pattern of earnings reports trading a few years ago and what we are seeing at present. Stocks may not valued cheaply, but that’s the only parallel between this earning season and those ugly quarters a few years ago. That supports our belief that this pullback is a mere period of digestion, and not the start of something more ominous.