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Independent financial advisers founded in 1975
Over £1.4 billion client funds under management
17 industry awards for advice since 1989

By Mike Williams, Genesis Managing Partner

Founder and Managing Partner of Genesis Asset Management, New York

Letter from America

As Good As It Gets?

By Mike Williams | Tuesday, 14 November, 2017

The latest on corporate earnings is that the averages have been doing far better than the stocks reporting results, even as the results are beating estimates.

In fact, not too long ago I wrote: "Given markets have rallied fairly nicely into earnings, I suggest we (should) not be surprised if we see some 'buy the rumour, sell the news activity' as reports come in...."

That's market speak for "hey, we might be a tiny bit ahead of ourselves for traders with itchy, short-term trigger fingers."

Sadly, we watched stock after stock beat, sometimes even beating and raising, only to see their stocks get pushed back.

And while I hate watching pullbacks internally this is actually very often a good long-term sign.

That’s because it tells us the masses are still very, very nervous about how high the market is, and provides us an insight into a weak underbelly of fear.

Investors are thinking “it can't be this good - so it must be ready to fall.”

Better News?

Well, corporate earnings have set more records, with zero sign of a recession near-term.

The next four to eight quarters all have record setting levels projected.

The total Q3 earnings for the S&P 500 index are on track to reach a new all-time quarterly record, surpassing the previous one achieved by the last earnings season.

Here’s a quick look:

Good Chart1

Also, the trend for forward earnings to adapt for Q4 has remained supportive – remember there’s a normal trend of expectations getting ratcheted downward by analyst as they do not want to be blamed for a bad miss. They bring estimates down and then companies beat and keep moving forward.

It’s a pattern that has continued over the last few years as the quarterly earnings reporting season gets underway.

The really unusual thing about Q4 estimates was that they actually went up at first and have started coming down again in the last couple of days.

That movement has brought Q4 growth expectations back to where they stood at the start of the period.

Good Chart2

More on Earnings

Now, we’ve seen the internal churn about which I’ve expressed concern.

So, I’ve included a chart below to give you a sense of what that spread looks like.

If you consider this alongside the somewhat extreme action occurring amongst the of the top-4 tech stocks, then you start to get a big spread over the broader market, which is skewing impressions a bit this year:

Good Chart3

Let’s keep in mind that more than 2,370 companies have reported Q3 earnings results since the season officially began back on October 9th.

With just a week left until the unofficial end of the reporting period, the S&P 500 is up 1.3% since the start of earnings season.

While the S&P's gain is nice to see, the underlying price action of S&P 500 stocks that have reported has been far weaker.

As the snapshot above shows, the average S&P 500 stock that has reported EPS this season has fallen 0.33% on its earnings reaction day, and some far more than that.

This means investors have been doing more selling than buying of individual stocks that make up the S&P 500 in reaction to their earnings news.

And that fits well with the idea that rallying into earnings season may feel good, but it often simply gets pinched back during the reporting process itself.

It's never as good as it feels or as bad as you think.

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