Can Q2 earnings reinstate the customary “surprise”?

Revisions to quarterly S&P 500 earnings forecasts have followed a familiar pattern every quarter for a number of years, until the two most recent quarters.

Previously, in the year leading up to the beginning of the quarter, the forecast is reduced an average of 6%. Then during the quarter and right up to the report date, earnings are cut an additional 4%. Subsequently, when actual earnings are announced there is a positive “surprise” of around 3%.

This pattern comes from analysts and the companies they follow doing a quarterly ‘kabuki dance’. Nobody wants a negative earnings surprise since it would embarrass the analysts, company management and stockholders. Instead they would rather under promise and over deliver.

In the fourth quarter of 2015 the 5% cut during the quarter was a bit larger than normal and we were well set up for the usual “surprise”. This time, however, the surprise didn’t arrive.

During Q1 2016 earnings forecasts were cut a lot, by around 10%, which came mostly from energy and financial stocks and should have left plenty of room for a positive “surprise”. So far, with 74% of companies reported, actual earnings have been only 2.6% above the forecast, so the positive “surprise” pattern has returned, but only because the forecast was drastically reduced.

The first quarter is usually the worst seasonally for earnings and the US economy. Despite the grim result in Q1, spring typically brings higher hopes, and so far analysts are optimistic for better results for the rest of the year.

Jeffrey Ricker – Mellon Capital, a BNY Mellon company

Revisions to quarterly S&P 500 earnings forecasts have followed a familiar pattern every quarter for a number of years, until the two most recent quarters. Previously, in the year leading up to the beginning of the quarter, the forecast is reduced an average of 6%. Then during the quarter and right up to the report date, earnings are cut an … read more

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Acquisitions boost US companies

US continues towards durable recovery

Outlook revisions provide a telling measurement of the health and outlook for US companies. Unsurprisingly, they traditionally occur during earnings season, when companies issue their own report cards. This quarter, it’s been all A’s — acquisitions, activists, America and avoidance of taxes. First, we’ve seen a dramatic surge in acquisition activity, as companies deploy low-cost capital and cash in highly accretive deals. Second, activists are out in full force, with no company immune to their influence, and they are successfully advocating for shareholder-friendly actions like dividends and buybacks. Third, the companies with the greatest exposure to North America had the most positive outlooks, as the US moves along the path of a durable recovery. Finally, one of the biggest stories of the quarter has been the avoidance of taxes, as several US firms employed tax inversions to their advantage. All of these factors are playing a role in driving earnings and shareholder value.

Brian Ferguson, senior portfolio manager, The Boston Company

Outlook revisions provide a telling measurement of the health and outlook for US companies. Unsurprisingly, they traditionally occur during earnings season, when companies issue their own report cards. This quarter, it’s been all A’s — acquisitions, activists, America and avoidance of taxes. First, we’ve seen a dramatic surge in acquisition activity, as companies deploy low-cost capital and cash in highly … read more

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As safe as houses… (again)?

House price growth vs earnings growth

UK housing market data suggests the UK once again finds itself in a cycle of consumer spending supported by credit rather than wage gains. Is history repeating itself?

Peter Hensman, global strategist at Newton.

UK housing market data suggests the UK once again finds itself in a cycle of consumer spending supported by credit rather than wage gains. Is history repeating itself? Peter Hensman, global strategist at Newton.

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