Does Earnings Pessimism Portend Favorably for the SP 500 Heading Into Earnings Season ?

In a word (or words), “Yes, yes it does” and we can thank the weekly Bespoke Report for the background and analysis.

Several times on this blog, I’ve written about Bespoke’s excellent “below-the-radar” research, even though as a frequent guest on CNBC’s Fast Money, (the Melissa Lee anchored, 4:00 pm central version), Paul Hickey, one of the founding partners is a frequent guest.

In this week’s Bespoke Report, the Bespoke crew addressed the negative sentiment surrounding Q3 ’15 earnings season, and compared SP 500 returns to the negative sentiment.

Some conclusions:

  • “In the 19 prior quarters where analysts were more negative than positive, the SP 500 averaged a gain of 2.32%, (median +3.64%) with positive returns 84% of the time.”
  • “Finally, the worst SP 500 performance during earnings season comes when the net revisions spread was positive heading into earnings season.”

(My comment: Bespoke’s “net revisions spread” is a SP 1500 measure that tracks negative versus positive EPS revisions similar to what I have shared with readers here in this spreadsheet: FC-eps estimate revisions, over the years. Readers have seen this spreadsheet before, and it provides a good historical record of positive versus negative analyst revisions. The blocks highlighted represent the peak earnings season, usually between Alcoa’s and Wal-Mart’s earnings reports, when the bulk of the SP 500 will report, and the comments on the right hand side, are simply my summary of the financial “crisis du jour”, which captivate the financial news networks. It is always something.)

  • Here is the rub, kids: by Bespoke’s math, “at a level of -24%, the current earnings season revisions spread is one of the more negative levels of we have seen heading into an earnings season, during this bull market.Looking back, at prior earnings seasons where the revisions spread was below negative 20% heading into earnings season, the SP 500 rallied an average of 4.35% during earnings season with gains each time.”
  • “Weakness in Energy and Basic Materials sectors has been and continues to be a big contributor to the overall negative tone in analyst sentiment.” (No surprise if you have been reading this blog for a while.)
  • “Analysts are marginally less negative on the prospects of companies with more US exposure than companies with more international exposure.”
  • …when analyst sentiment is negative heading into earnings season, the two best performing sectors have been Consumer Discretionary and Industrial’s.”

Summary / conclusion: While this coming week could be bumpy given October’s option expiration week, Bespoke provides some worthwhile quotes and juicy data demonstrating why institutional investors should remain fairly bullish, through calendar Q4 ’15. The earnings revision spreadsheet (data compliments of Thomson Reuters) goes back a long way.

While some Energy exposure has been purchased for client accounts the last few weeks, I’m also preparing an earnings preview of Schlumberger (SLB) and Halliburton (HAL) for publication on SeekingAlpha.com and I have to tell you, the EPS (earnings per share) and revenue revisions for 2016 and 2017 are rather unsettling. Any earnings and revenue growth for both companies projected for 2016 is eroding rapidly. Both years numbers continue to get taken lower, and pretty sharply at that. I’ve been flip-flopping on the Energy sector, trying to determine if stock prices have discounted all the bad news.

In my opinion, Bespoke perfectly captured the current angst between Q3 ’15 earnings which start this week, and historical SP 500 returns when faced with this level of earnings pessimism.

My favorite statistician, Ryan Detrick, notes that as of October 6th, October ’15 is off to one of its best starts in 77 years. Ryan is a fellow Xavier alum and someone the school’s Finance Department should be proud of. Me, maybe not so much…) Another friend, Jeff Miller captures the earnings worry perfectly in his weekly “A Dash of Insight” blog post.

Statistically, and from a sentiment perspective, October and Q4 ’15 should turn out quite well.

Thanks for reading.

 

 

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