The earnings season has started. Before the wave of bottom-up news flow hits, here’s what to expect and what to look out for.
Expect an OK earnings season. Not great, but also not terrible. Similar to the last one, where current (Q1) numbers hold up well, but with cautious outlooks not good enough to really impress investors. Some downgrades from analysts post results, but there’s nothing in the early indicators to suggest that this will be a the earnings season that triggers a wave of downgrades.
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The economy was strong in Q1. Yes, PMIs have been weak, but current activity data has stayed solid through Q1. The Atlanta Fed’s GDPNow looks pretty healthy and that’s more important for Q1 results. The PMIs make you worried about future quarters, so expect cautious outlooks.
Early reporters have been alright in terms of beating expectations on the backward looking Q4 numbers. A fairly typical % of companies beating estimates and only slightly fewer companies than normal outperforming on the day.
Guidance has been surprisingly positive recently. To do this when everyone is talking about recession and bank runs signals confidence and is a good sign on how solid current earnings are and how unlikely to disappoint corporate profits are today.
Consensus estimates have been ticking higher over the past few weeks, but remain down on the year. Earnings revisions have also stayed negative, with still more downgrades than upgrades across all regions.
Bottom up consensus is for -6% yoy EPS growth for the S&P. Adding a slightly below average beat takes you to around -3%. So more of the slowing growth trend of the past few quarters, but within the margin of error of flat earnings. Especially because that index number is pushed down by some large cap outliers. Median company expectations are flat.
The theme stays: revenues up, margins down, earnings flat. The real pain starts when revenues go south and operating leverage amplifies the effect on earnings.
Earnings season won’t answer the big question for market direction. We’re still in Phase 1, debating ‘recession’ or ‘no landing’. Q1 numbers are backward-looking and company comments have no track record of leading at turning points. They are not a leading indicator and tell you little about recession probabilities.
The start of the season is always dominated by Financials. It takes a couple of weeks before we have a broader sample, so don’t extrapolate from the early numbers.
One thing we could learn from the early Financials is more colour on the bank run fallout and tightening financial conditions. Maybe some numbers, but more likely colour from the commentary. Recent comments have been of subsiding stress, but we’ll now get a broader sample.