Taking Cues From the Market

April 28, 2020 | Jessica Noviskis, CFA, Associate Director

Amid today’s extraordinary levels of uncertainty and speculation, we welcome anything that can offer some sense of visibility. Earnings season tends to be just that, giving public companies a platform to formally update the market on their recent performance and future outlook. While guidance in this environment is not what it normally is, the market’s reaction to what is said offers insightful perspective into the thought process of active participants.

During the first two weeks of earnings season, we heard from companies across sectors, representing almost a quarter of the S&P 500 Index’s market capitalization. For this analysis, we focus on the change to consensus current fiscal year (FY1) EPS estimates. This should not only capture actual results reported, but the outlook for the rest of the year. For companies that have already reported, estimates have come down more than 20%, with an initial modest revision going into earnings and a larger cut post the report.

On average, stocks were flat across sectors despite these major cuts to earnings expectations. Certain sectors particularly stand out — FY1 EPS expectations for Energy stocks came down an additional 42% after earnings reports and stocks were up 1% in response while Consumer Discretionary expectations were cut an additional 33% and stocks rose 6% on the news. While there are nuances not captured by these averages, from a high level it implies company results and outlooks were roughly in line with buy-side expectations — in some cases better — refuting one of the oft-cited catalysts for a correction to the rebound that some argue has gone too far too fast.

We do not claim to know where the market is headed from here, but early signs from earnings season give us reasons to be optimistic that, for now, the bottom is in.

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