Earnings season is well underway. We provide an overview of recent announcements and look at the technical strength of the top beats and misses.
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Surprise! Stick with the technicals. Earnings season for Q4 2019 results is well underway, with 64% of the companies in the S&P 500 Index SPX having reported as of Friday, February 7th. So far, 71% of the companies included in the large cap domestic equity index that have reported posted surprise earnings per share (EPS) beats, while 67% of the companies reporting have posted positive revenue surprise beats. Currently, the blended earnings growth rate for the S&P 500 is 0.7%, which, if sustained, will mark the first time the index has reported year-over-year growth in earnings since Q4 of 2018. Additionally, the S&P 500’s forward 12-month price/earnings (P/E) ratio is 18.8, well above the 5-year average reading of 16.7 and the 10-year average figure of 15.0 (source: FactSet Earnings Insight).
With the positive backdrop and abundance of exceeded expectations, do earnings surprises suggest an immediate technical turnaround? Not necessarily. When assessing the top ten EPS surprises, we find that the blended portfolio has an average technical attribute rating of 2.10. While 60% of the names are on a Point & Figure buy signal, only 40% trade in a positive trend. This is not much better than a blended portfolio of the 10 worst EPS misses, which displays an average tech attribute rating of 1.70 with 50% of the stocks included trading on PnF buy signals. Additionally, 50% of the names included in the "Miss" portfolio trade in a positive trend, exceeding the current average figure for the "Beat" portfolio. Earnings season is undoubtedly an important time of year for investors as it sets the tone for future sentiment and expectations. However, until the weight of the technical evidence turns positive, a surprise earnings beat may be less of a catalyst for new potential long investment and more of a reiteration of what has already been priced in.
