More than half of the S&P has published 1Q earnings and EPS growth is slowing sequentially. Revisions have been strong though as companies continue to handily beat consensus estimates. Since the start of reporting season, we have favored higher Quality over higher Turbulence stocks. There are two related reasons for that: 1) higher-quality names tend to miss EPS estimates less, and 2) companies that miss estimates tend to underperform. Underperformance following earnings misses has been stronger than normal over the past few quarters, which has increased the returns to AVOIDING misses. The underperformance of names missing earnings has accelerated this quarter.
We focus on factors and sentiment scores to better predict earnings beats and misses. Stocks with high Earnings Quality and high Earnings Sentiment (long basket) are more likely to beat estimates, while the names with high Earnings Turbulence and negative Earnings Sentiment (short basket) have a lower beat percent than the overall index. The strategy has been effective for most quarters since 2010, and particularly so since COVID.
Excess returns around stocks in the long basket have also been slightly better than the index, and much better than stocks in the short basket. Stocks in the short basket posted declines even if they beat estimates. The long basket is a safer play during earnings season.
Next week, 163 companies will report earnings. We list the names reporting next week in the long and short baskets in this report.
Sentiment shifts have been driving market swings this year. YTD, the S&P PE was down -3.9 points earlier this week, a rate of decline similar to the COVID selloff in 2020. S&P first PCA has remained stable this year. That suggests a sentiment-driven market with diverse micro themes, and that means continued volatility and rapid rotations. The Fed meeting next week could be one such event, though the valence of that even is still uncertain. What we can quantify is that the sentiment skew, relative to macro data, has become extremely negative. The last time investors’ sentiment was as negative relative to the breadth of macro data was in late-2020.
Quality + Strong Sentiment Through Reporting Season: More than half of the S&P 500 has published 1Q earnings. Earnings growth has slowed but revisions have been much higher than normal into earnings season, indicative of another strong earnings season. Following the trend in 4Q, misses are being punished more than normal. Excess returns are mixed. AVOIDING earnings miss has become increasingly important.
We focus on factors and sentiment scores to predict earnings beats and misses. Stocks with high Earnings Quality and high Earnings Sentiment (long basket) are more likely to beat estimates, while the names with high Earnings Turbulence and negative Earnings Sentiment (short basket) have a lower beat percent than the overall index.
This season ~83% of S&P companies have beat consensus estimates, setting a high bar for any screening tool. Focusing on high Quality names increased that beat rate to 84.4%, but layering strong earnings sentiment rankings boosted that beat percentage to ~93%. Our sentiment rankings, powered by the Amenity natural language processing tool, are updated throughout reporting season and generated readings along dozens of categories (see our sentiment primer here). Let us know if you would like to hear more about the tool.
The long basket (high Quality of Earnings + high Earnings Sentiment) usually has a better beat percentage than the overall market. Recently the beat rate has been even better than the historical median.
Excess returns around stocks in the long basket beating estimates have also been slightly better than the index, and stocks in the short basket gained less excess return even if they beat their estimates. The long basket is a safer play during earnings season.
Screening Next Week’s Earnings Releases: Next week, 163 companies will report earnings. Below we list the names with high Quality of Earnings and positive Earnings Sentiment scores. The basket is more likely to beat earnings and is a safer play given the return profile so far this quarter. (let us know if you would like the complete rankings for next week).
The stocks in the short basket reporting next week are listed below.
Beyond Earnings Season: Sentiment shifts have been driving market swings this year. YTD, the S&P PE was down -3.9 points earlier this week, a rate of decline similar to the COVID selloff in 2020. As we detailed above, earnings growth has been consistently strong over the past several quarters, consistently surprising to the upside. Macro uncertainty is contributing to PE/market volatility, but S&P first PCA has remained stable this year. That suggests a sentiment-driven market with diverse micro themes, and that means continued volatility and rapid rotations.
A sentiment-driven market is very difficult to forecast as narratives can shift much faster than data. So far this year, macro events (Fed meetings, war developments, fiscal interventions) have been catalysts for shifts. The Fed meeting next week could be one such event, though the valence of that even is still uncertain. What we can quantify is that the sentiment skew, relative to macro data, has become extremely negative. The last time investors’ sentiment was as negative relative to the breadth of macro data was in late-2020.
And macro data is ALSO being held down by sentiment. Hard data (actual things) is MUCH stronger than soft (sentiment) data. Even within economic data, worries about the outlook are having a disproportionately negative impact.
