It seems like only yesterday that we were opining on the upcoming earnings reporting season and what it would mean to the equity markets. Our pre-season musings then, as now, focused on whether the lack of up-front negative earnings preannouncements signaled anything—they did. As the previous season unfolded our attention turned to the constituents of the individual reports—that companies were making, even beating, their bottom line estimates but with less-than-expected top line growth, thereby supporting our view that companies cut early and cut deep. When it was all over, given the data, we asked the question “now what?” What would occur during the post-reporting corporate news void and what would the next season look like, in light of the makeup of the current reports?
So here we are again, staring at an approaching tidal wave of corporate data that has the potential to produce significant moves in individual stocks, industries, sectors and the market overall. So far, once again the pre-announcements have been positive. What do we expect going forward? Our pre-season analysis suggests pretty much a repeat of last quarter. Wall Street analysts, having been cowed by the rapid implosion of earnings last year, generally did not accept company guidance nor did they optimistically raise earnings and sales expectations after last quarter’s reports. Company management, in the meantime, continued to cut overhead but there is nothing to indicate that their revenue growth has resumed to any great extent. What this all means is another round of “earnings beats” paired with tepid top line growth. Last quarter, that trend was sufficient to produce a nice return on stocks as the so-called “second derivate” trade was confirmed. This quarter, however, companies may get a “free pass” only if their forward guidance is sufficiently optimistic.
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