We are about halfway through earnings season, and it looks like another quarter of double digit year-over-year earnings growth. This now makes something like 14Qs in a row. That’s the good news.
To a large degree the market has already priced in these double digit year-over-year earnings gains. We see that in several data points which we discuss below.
I look for divergences, things that are different from last quarter. And on that score, there are several issues worth exploring, as they portend that something is changing in both the markets and the broader economy.
Our first chart "comes to us from Birinyi Associates Chart of the Day, and looks at the S&P500 misses versus beats on earnings: So far, we are seeing 72% of companies actually beating consensus. That ties for the best in 4 years. Misses are a mere 10% — also the best in 4 years.
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S&P500 Earnings Beats vs Misses
Courtesy of Birinyi Associates
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This clearly shows the quarterly numbers are coming in better than expected.
Now is where things get interesting. Merely knowing earnings are doing well is insufficient information for investors. The key question is, how much of the good earnings are built in? How are stocks reacting after the good reports?
The chart below shows exactly that. Here are the following day returns after both upside and downside surprises:
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Average Price Change: Beats and Misses, EPS
Courtesy of Birinyi Associates
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Look at the left chart in green — that is EPS Beats. The reaction to good news is the smallest its been since 2002 (see the blue bar at bottom left), and way below the recent average if 1.2%.
That implies that most of the good news is already built into stock prices.
On the right in red, we see the EPS Misses. The next day reaction is the most severe we have seen in four years. Stocks that miss get brutally punished, and are beaten up way more than the prior four year average of 2.37% the following day.
This implies that the bad news is not yet factored in.
Finally, lets look at the last of the earnings call elements: Guidance. According to Ashwani Kaul, Reuters Fundamental Market Analyst, guidance has dramatically diverged from the past few quarters, shifting to a negative 2 to 1. Particularly warning of weaker earnings and/or revenues has been the Tech sector, and Consumer Cyclicals.
To some degree, this may be reflected in the price already. The Nasdaq has gotten slammed, and it may simply be a matter of the market anticipating a slowing (Tech is far more cyclical than most people realize).
This may also explain why the misses are getting beaten up — the combination of a miss and guiding lower could what is the divergence from prior quarters.
i am following your 5 day after surge theme and it appears the market is behaving pretty well…so is it time for the bear to roll over, Barry?
I think these extraordinary profits are in some way nonsense and product of credit bubble/liquidity etc..Even if market is up next 2 days, i am not buying into it.
OK, here is a minimally related anectodal evidence of consumer spending dropping-off. Is it the consumer sector companies with the misses? Like Amazon?
Tuesday this week during a mid-day walk I spotted a friend of mine that is a lobsterman in Marblehead, MA unloading his catch at the dock.
He complained that all last year the lowest price he was paid at the dock was $4.80 / lb. On Tuesday he was getting $4.00.
The reason his buyer gave him for the crappy price was “the economy is going to shit”.
To me, it’s seem clear as can be that the economy is headed straight into a recession. Yet the market is surprised.
This seems to me to part of a pattern in our society these days…
How much of this effect is due to market conditions at the time of earnings release? We are in the middle of some of the worst market action in the last few years.
It is very clear that people are loath to commit new money to the companies that meet/beat expectations and they’re dumping the stocks of those that disappoint.
I don’t see any reason why big money is going to pour back into the better performers given that guidance is iffy and visibility deteriorating.
I just listened to some guy (Pacific Something Equities?) on CNBC talk about the same phenomena — dissapointing stocks get abused, while good earnigns are greeted with a shrug.
His take was that this was a sign of negativity and bad sentiment. As he was speaking, the market gapped up 3/4 of a percent on the open, thus proving just how much negativity there is.
Of course, he never even considered the possibility that the good news was already built in.
Awesome data, Barry. Many thanks!
IMO, the fundament underpinnings of the market are getting extremely weak.
As during the entire year leading up to May, the technicals were getting weak. Few new highs, breadth stunk, etc. which is why so many “crash omens” popped up. And you can see what happens when the market experiences huge negative divergences – it holds up until it doesnt. And when it doesn’t, the selloff comes fast and furious as those negative technical underpinnings come to light.
I think the same thing is going on here regarding fundamentals. There are weak earnings out there. And the market may hold up for some time. But when it finally takes hold, it will be enlightening to say the least.
hello from germany
great!!!!
I’m not too sure anyone is really surprised. The futures players are playing games right now.
B-
Is that related to rumored Fed-sponsored offshore activity or are you talking about something else.
Remember that the bradley model turns down today and Jupiter-Saturn signature T square is working on a market crash in a month or so. Hang on gang!
1. Earnings 2. Reaction 3. Guidance
Once again Barry Ritholtz provides some timely information on market conditions, with a look at the current earnings season. The chart showing the stock price reactions is most informative. Barry’s explanation, however, is not very persuasive. First ta…
People must be scratching their heads… “Whats the matter with this %&*# market??!!, It should be going up!!”. Little do they understand, that the market does not live in the ‘now’. I’ve heard some say its 6 months ahead of current perceptions.
Statistically, this being the 2nd year of the “presidential cycle”, negative returns should have been no surprise. Barry has mentioned this in his blog a few times. Just as the planets don’t deviate in there cycles around the sun, it is foolish to bet the market would deviate from its natural cycles. Add to this that May through October are seasonally the weakest, and long investors are really up against tough odds.
And for those that think when 2006 passes, we should start seeing the light at the end of the tunnel, I’d say don’t count on it.
Oct 2006 through Oct 2014 will be a very tough time for the market if there is any credence to the 40 year cycle. Look at Oct66->Oct74… negative returns. Look at Oct26->Oct34… negative returns. Sure there may be some rallies here and there, but, I wouldn’t stake my 401K on it.
To be precise, the cycle is 34.4 years. lol.
Reasonable investors in US stocks are invited to think about this:
When Congress/White House are forced to cut budget deficit by say $100 billion, what will be the effect on employment, spending, and profits? What if government had to let all the air out of the deficit cushion and cut $500 billion?
No wonder investors are leary about glowing prospects for the future of US stocks – they’re riding on air.
Its Not the News
that matters – its the reaction to the news that really matters in this game.
Over at The Big Picture, Barry goes over some interesting charts from Birinyi Associates. What they show is that in the context of the past 4 years, SP 50…
Barry,
Are you gonna post your critique of Altucher’s work? I think it’d be invaluable to your readers, and the analysis is just devastating.
According to you perma-bears, if history always repeated itself, the market averages would have never gone up in the last 80 years. We would just hit highs, then fall back to lows, hit highs then fall back to lows. How do you explain the S&P and Dow growth over the last 10 years?
Some differing views on this website might make for more interesting discussions don’t you think?
“We are about halfway through earnings season, and it looks like another quarter of double digit year-over-year earnings growth. This now makes something like 14Qs in a row. ”
Correct
“To a large degree the market has already priced in these double digit year-over-year earnings gains.”
WRONG!
“So far, we are seeing 72% of companies actually beating consensus. That ties for the best in 4 years. Misses are a mere 10% — also the best in 4 years. ”
Correct
“I look for divergences, things that are different from last quarter. And on that score, there are several issues worth exploring, as they portend that something is changing in both the markets and the broader economy.”
Yes…the ‘nail head meets the hammer’…what is different is that the Fed is at the inflection point (just like late ’94/early ’95) right now….will they lead us off a cliff (bear case and earnings miss reactions) or will they take this weight off the market’s back. What has changed is investors perceptions….bearish views are the “easy” view right now…as it’s darkest before the dawn. I’ll take the other side of your crowded trade/view Barry (with all the respect in the world)
Peace
>>>Barry,
Are you gonna post your critique of Altucher’s work? I think it’d be invaluable to your readers, and the analysis is just devastating.<<< I think both Barry and Altucher have valid points and did a great job in their articles. If you want *general advice* about ALL stocks, then listen to Barry. Don't buy new lows, chances are you will underperform. If you want to take the contrarian approach and buy at new lows, there are *certain parameters* that Altucher points out that can give you a winning strategy. What else is there to say?
High/Low Logic Index is once again spiking, pointing out the internal divergences forming as bulls crowd into a dwindling pool of stocks.
It stands tonight at 1.50. Previous spikes were 1.58 on 4/18 and 1.39 on 7/12.
I an only kidding but perhaps now that management can’t backdate their options anymore they are knocking down their shares with bad guidance so they can, you got it, simply reprice all their options at a lower price. And the bad guidance is Ben at the Feds’ fault not theirs for slowing the consumer too much…hey, maybe I’m not kidding.
per Mark:
“B-
Is that related to rumored Fed-sponsored offshore activity or are you talking about something else.”
I’ve seen several references to that in various places over the past week or so- hedge fund(s) using govt credits, maybe operating outside of the Fed (i.e., rogue). Wouldn’t surprise me if so, but it would be pretty hard to keep quiet for very long and probably be rather ineffective. We’ll see.
1. Earnings 2. Reaction 3. Guidance
Once again Barry Ritholtz provides some timely information on market conditions, with a look at the current earnings season. The chart showing the stock price reactions is most informative. Barry’s explanation, however, is not very persuasive. First ta…
Stocks can keep making new 52 weeks lows for weeks and months on end and build a base for months or years (like MSFT). Why waste your time. There are way better ways to decide what to buy.
Well, I don’t know what the market is going to do next year nor do I know what the economy is going to do! What I do know is that my funds are going into bank CD’s as I eliminate my stock portfolio. Why buy stocks when corporate management legally steals from the stockholders under the pretense of compensation using stock options that they get for nothing in many cases? They then sell the stock on the open market, use corporate funds to buy back stock to help increase EPS and then reissue the shares to themselves using more options that they get as an incentive for having increased EPS? This process builds in a hidden but negative growth rate while diluting the existing stockholder equity. This is nothing short of a scam! No, the bank doesn’t pay very much for using your money but at least bankers don’t water down your principle and subject it to market risk and stock manipulation using options, buybacks and option backdating. I worked in the brokerage business many years ago and it seemed more honest back then. These spoiled and pampered baby boomer CEO’s are so used to stealing music and computer programs as kids that they think it is perfectly okay to take whatever they want from the stockholders who are supposed to own the company. The SEC needs to sue some corporate boards and put the heat on these greedy officers and directors. Never have so many stolen so much without fear of punishment. These people are running public companies, not private companies and the government needs to exercise some control over the pillaging.
I tell every young man with retirement money to invest to be very careful when buying stock. He may end up owning a great growth company of the past which has lots of money that he will never get to see because the company is run by people who act like it is their private company and bank account. Good luck in the contest if you are a investor instead of a trader. Good luck in the contest if you are a trader competing with the market pro’s who will always win. No, to heck with trying to guess the market and the economy. Just save your money and let Alan Greenspan easy-money policies generate inflation and kill whatever purchasing power your saving have! Anyone interested in retiring down the road is going to be in for a rude awakening as inflation, health-care costs, energy, food, clean water, etc. eat up your income from whatever source. I know – it is happening to me! And it will get worse as time passes because inflation causes more inflation. Just my thoughts on a very depressing subject that rich folks don’t have to think about. I hope Ben raise rates to six percent because it is going to take that to even begin to cool things off. I remember what happened in the 70’s and 80’s. The cure is painful but necessary.
per RJ:
“I hope Ben raise rates to six percent because it is going to take that to even begin to cool things off. I remember what happened in the 70’s and 80’s. The cure is painful but necessary.”
Spot on post, my friend. But it ain’t gonna happen. Everything is going to crap out, but more liquidity is going to be the cure again, so we just defer the reckoning again until it will take ten percent and the democrats can take the blame in a couple of years.
I am not “rich folks.” but don’t have to worry about too much personally either. What I do worry about is the overall trajectory of things and how it impacts people who live from paycheck to paycheck who keep the rest of us going? 99% of the CEOs are clowns who could just as easily be selling stereo systems at Best Buy and would not be missed if they all disappeared tomorrow. The people doing the work matter and they are in for a bad ride.
Thanks Barry for this wonderful piece of info. I had a similar impression, but it’s always nice to get some stats for confirmation.
1. Earnings 2. Reaction 3. Guidance
Once again Barry Ritholtz provides some timely information on market conditions, with a look at the current earnings season. The chart showing the stock price reactions is most informative. Barry’s explanation, however, is not very persuasive. First ta…