Weighing the Week Ahead: New Information from Earnings
After many weeks of mixed economic data, this week will provide information from a fresh source: corporate earnings. Expectations for 2010 moved up after the data for Q409 showed strength.
Robert Kavcic, an economist at BMO Nesbitt Burns, notes that at the
beginning of 2010, the consensus analyst estimate for 2010 earnings for
S&P 500 companies was 8.6 per cent below 2009 levels. On the
strength of the fourth-quarter 2009 and first-quarter 2010 earnings
reports, 2010 estimates have been jacked up so much that the consensus
numbers are now 34 per cent above 2009.
For the second quarter,
consensus estimates are for earnings to grow 27 per cent over 2009’s
second quarter, according to Thomson Reuters.
“The last three
quarters have been absolute blowouts with respect to earnings
surprises,” Mr. Kavcic said, as about 80 per cent of S&P 500
companies have beaten consensus, versus a historical norm of about 66
per cent. “But the market can only be fooled for so long … it won’t be
surprising if the impressive rate of earnings surprises seen in the past
three quarters marks the high watermark of this cycle.”
Can this really be sustained?
Expectations now include significant gains for the next few quarters.
The good times should continue to roll for the next four quarters, based
on analysts’ estimates. The Street is targeting growth of 25% in the
third quarter, 33% in the fourth and 13% and 20% thereafter. In all,
that would mean the S&P 500 would produce $82 of earnings this year
and $96 the following year. That would catapult earnings above the
previous record of $88, hit three years ago.
The earnings debate has many twists and turns about how high the bar has been set, whether earnings come from revenue increases, and the outlook. That is our focus this week, but first let’s review the big rally.
Background on “Weighing the Week Ahead”
There are many good services that do a complete list of every event
for the upcoming week, so that is not my mission. Instead, I try to
single out what will be most important in the coming week. If I am
correct, my theme for the week is what we will be watching on TV and
reading in the mainstream media. It is a focus on what I think is
important for my trading and client portfolios.
Last Week’s Data
My preview last week emphasized the deteriorating technical picture and suggested that the chartists had taken over. Nearly every indicator was flashing “danger.” Let’s take a closer look
You would expect plenty of good news in a week where we have a 5% rally. Not so much. The market moves seem not to reflect specific changes in the fundamentals. Bespoke Investment Group notes that most sectors are now back in the normal trading range. If you were on vacation, you might have missed it all! As usual, it is worth checking out their great charts.
There were a number of positives:
- The technical picture. While the “death cross” is still in effect, the market is back in the perceived trading range. Abnormal Returns helped me monitor the research of past results on this subject. I also enjoyed the new video link summary and commentary which features this subject (and thanks also for mentioning “A Dash”). I have been considering doing an occasional video, buy my son says, “No.”
- The Blue Chip Economist survey, while lowering growth estimates slightly, sees talk of a double-dip recession as overblown, absent some unforeseen shock. This group of 50 agrees with the large Wall Street Journal panel. These are not just sell-side forecasters. The panels range widely. Also in agreement is the ECRI’s own interpretation of their data.
- Initial claims showed nice improvement. It is only one week.
- The changing investment backdrop does not usually go from night to day. Important changes may happen gradually, as I explained here.
- The dog that is not barking is one that most people may have missed. There have been very few pre-announcements, down about 1/3 from the last two quarters. That is usually a sign of good earnings.
- There are continuing problems with job creation, mostly with small business. Calculated Risk covers the story, highlighting the shortage of customers as the key.
- The ECRI WLI continued decline is a negative, even if you interpret it only as slowing growth. Here is a more bearish take from BondSquawk (HT Abnormal Returns).
- The Baltic Dry Index decline continues. I do not see this as very important any more, but I have a dilemma. I hate pundits who switch indicators without good reasons, simply because the facts do not fit their theory. (Check out the yield curve slope for an example). Next time this indicator is bullish, I need to remember to do an article on it, so I can exit gracefully. It captures too much supply and not enough demand, especially since the Olympics in China.
Sometimes you are surprised in ways you cannot even imagine. Last week I wrote (yet another) article trying to explain my take on our job creation problems. I almost chose a different subject, and really saw it as a routine night’s work. I indicated in the article how difficult it was to make a difference even when there was something I felt was an error in a popular article by an influential analyst.
Proving me wrong on my main theme, John Mauldin reached out for a conversation. After a few hours discussing data, we zeroed in on some areas of agreement. I also made a new friend. John’s gracious discussion in his weekly newsletter helps to focus our attention on better analyzing the problems in finding new jobs. He offers an interesting hypothesis, with some data in support. I also received comments and email with other good ideas. This will help my own research.
Thanks, John. And thanks also to others who offered constructive comments.
The Week Ahead
We have data this week, but I see it as much less important than earnings. I am not expecting anything exciting from the Fed minutes nor from the late-week inflation reports.
As I consider the earnings reports, I have a particular perspective.
Jeff’s Perspective. For long-term investors you can focus on the facts — actual business progress and beating earnings expectations. I am not very interested in the macroeconomic forecasts of CEO’s. Most of them are reading the same news we are. I am very interested in specific trends in their businesses, recognizing that these are concurrent indicators. I care about their hiring plans. I do not care about their earnings outlook, since everyone is so cautious.
Market Perspective. I expect the market to react differently. Companies that do not give a positive outlook will have trouble in this environment. There will be special attention paid to any company that cites Europe as a source of weakness.
We will know pretty soon if my guess about the skeptical market reaction is correct.
Our own indicators turned bearish right after our May 9th report
have been neutral or bearish since then. It is a world that is difficult to forecast. The model is still neutral, and that is our vote in the weekly Ticker
Sense Blogger Sentiment Poll. Here is
what we see:
- Only 25% of our 55 ETF’s have a positive rating and three of these
are inverse ETFs. This is about the same as last week and remains pretty weak.
- 100% of our 55 sectors are in our “penalty box,” up from 68% last
week. This is a serious deterioration in our key measure of uncertainty.
- Our universe has a median strength of only -21, down from -16 last week.
[For more on the penalty box see this article. For more on the system ratings, you
can write to etf at newarc dot com for our free report package or to be
added to the (free) weekly email list. You can also write personally to
me with questions or comments, and I’ll do my best to answer.]
For short-term accountswe had some long positions at mid week, closing profitably when the penalty box warning popped up.