Sentiment on both Wall Street and Main Street has collapsed to extremely negative levels.It’s been suggested that all of the downward revisions to earnings estimates are a bit of a silver lining for stocks because the revisions lower the hurdle that companies need to clear to generate a positive surprise by beating expectations when they report earnings.
Andrew Lapthorne of Societe Generale disagrees, saying that any momentum from companies beating earnings this way will probably only be fleeting.
In a note to clients, Lapthorne writes:
Of course this is a particularly silly reporting season period, where on one hand earnings estimates have collapsed, yet on the other the majority of companies are producing positive “surprises.” Such silliness will only encourage the idea the equity market is increasingly not really fit for purpose. As we have written about in the past these fabricated “beats” have no positive impact anyway as there is little in the way of follow through with future upgrades. So any market momentum generated typically proves temporary. The beating appears to provide the financial media the chance to write more favourable headlines on the day of reporting…
If historical trends are anything to go by we would expect earnings momentum, the ratio of upgrades versus total estimate changes to tick up temporarily from here as analysts are forced to incorporate the recent “surprises” into their numbers. However there is no denying that earnings momentum is currently very weak, registering a lowly 34% globally and a terrible 27% in the US. Fixating on the forecasts growth rate for this year is of course misleading as these can evaporate very quickly, best to look at year on year changes in 12 month forward or trailing earnings which are now showing many region profits to be in decline.