With close to 85% of the S&P 500 components having reported calendar Q1 earnings so far, I think it is safe to say results were a mixed bag. While the official beat/miss statistics may paint a rosier picture, most beats came as a result of consistently lowered consensus estimates since the end of 2014, and just a wee bit of financial engineering. Better than expected results were the norm from Energy / Materials, Financials and Technology. A look at the sector performance over the last month shows these sectors outperforming all others:
The stabilization and rebound of commodity prices can explain the beats in Energy/Materials, while Apple’s massive beat accounts for more than a bit of Technology’s earnings outperformance, and with the yield on the 10 year below 2% for most of Q1 I think it is safe to say that expectations, and estimates, were very low for Financials.
Amazon (AMZN) and Netflix (NFLX) saw their shares rise 14% and 18% respectively the day after their results but they weren’t part of a trend. There didn’t seem to be many large cap stocks that reported in the last month that saw outsized moves to the upside.
On the flip side it seemed that investors shot first and asked questions later on worse than expected results. Bespoke Investment Group ran an interesting chart the other day showing the average one day percentage change on earnings for stocks missing eps estimates, while this doesn’t speak to the miss rate, it does show how investors treated misses of crowded sectors like Health Care, Consumer Discretionary and Technology. The one day declines for those sectors were on average two times that of the average -2.29% decline:
I think it is safe to say that the average move to the upside for stocks that beat was far less than 2.29%.
For starters consider Apple (AAPL) 1.5% decline last Tuesday following their monster beat. Or Goldman Sachs (GS) first breaking out to new multi-year highs on their beat, and giving it all back to close down 45 bps. Or Caterpillar (CAT) only gaining 1% after rising close to 5% following their beat. Or Exxon (XOM) closing down 50 bps after their beat. So yes, there were a few like AMZN and NFLX that had absurd breakouts, but alot of important names beat but the news already seemed to be in the stock. The only really important S&P 500 company to have massive gains, at least in market cap terms, was Microsoft, gaining 10.5%, or about $33 billion in market cap.
The obvious take-away here is that the beats in Q1 were for the most part reversals of prior trends (energy), low expectations (financials), a handful of companies driving most of the sector’s beat in aggregate terms (AAPL & MSFT) and of course the near record levels of stock bought back by U.S. corporations to smooth earnings headwinds from the strength of the dollar. US stocks, despite their underperformance to most global equities in 2015, seem like a crowded trade, just biding time for something to spark real sales growth.
I am not sure where that is going to come from given what seems to be an endless deluge of poor economic data here in the U.S. I’ll end this post quoting myself from the last week. From Tuesday:
and last Friday:
Maybe we can wait to have a real conversation about the overall health of the stock market when the SPX is testing 2000. Maybe until then we remain rangebound, and the last few days weakness, at least in equities is just noise. It’s hard to tell so far.
In the near term the main event will be stocks’ reaction to tomorrow’s jobs report. We know the bond market has already spoken.