Disclaimer: Views in this blog do not promote, and are not directly connected to any Legal & General Investment Management (LGIM) product or service. Views are from a range of LGIM investment professionals and do not necessarily reflect the views of LGIM. For investment professionals only.

Earning sensation: what should we read into strong early results?

The early signs are that this will be a strong earnings season. I have two questions about what this could mean for investors.

 

It’s that time of the quarter when the ‘bottom-up’ news flow suddenly explodes: earnings season. There is little reason to expect anything but lots of good headlines. It’s typical for analysts to trim estimates heading into reporting season, but the opposite was the case this time.

Analysts’ earnings revisions have been to the upside, suggesting both companies and analysts are comfortable with estimates. Negative pre-announcements relative to positive ones have also been close to record lows, sending a similar message of corporate confidence. Finally, early reporters – companies with November quarter-ends – have been beating analyst estimates on both revenues and earnings by an unusually large degree.

However, I do have two questions about this earnings season.

1) Will the good numbers be good enough for the market after the rally?

With the S&P 500 up by close to 20% since the US election and vaccine announcements in early November, and sentiment indicators looking more bullish, investor expectations will have risen. Earnings seasons are a time when investor expectations get a reality check.

2) Do fourth-quarter earnings even matter?

It’s also possible that this earnings season will be much ado about nothing, at least at the aggregate level. With the vaccines beginning to be distributed, economic re-opening and normalisation may not be immediately around the corner, but that path has been greatly de-risked. Bad news may therefore be more easily interpreted as temporary. We have already seen this with poor economic data being largely shrugged off, like last week’s US retail sales report.

Judging by the market reaction to the results from early reporters, the answer to question one is ‘yes’ and the answer to question two is ‘a little’. Not only did early reporters handily beat estimates, the market reaction has also typically been slightly positive. We don’t seem to have reached a level where hopes have exceeded reality.

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