4Q earnings releases are starting to ramp up (~25% of S&P names have reported so far) and there is an interesting divergence in expectations. According to our survey work (HERE), almost all (92.5%) of the investors expect a neutral or positive market impact from 4Q earnings. BUT ~30% of respondents think other people are looking for a negative market reaction. The conclusion is that we should expect a neutral/positive reporting season market return.
Defensives have had highest beat percent with an 86% beat rate, but the n is small (21). Also, most of the Defensive beats are in the 0-5% range, which isn’t typically enough to generate excess performance. Early Cyclicals have a lower bear rate (79%), with ~3x the number of names reported. There have also been a larger number of large beats within Early Cyclicals. The takeaways are 1) beat rates are high across groups, and 2) Cyclicals in general have had more of the large beats that tend to lead to outperformance.
EPS sentiment has been moving higher, recovering from its 3Q decline. We break earnings sentiment into two groups, external earnings sentiment (macro influenced) and internal earnings sentiment (company specific, long-term charts HERE). That distinction is useful during periods of macro recoveries like we are in today. Firm macro trends should reduce management negativity over time, resulting in an upward bias to sentiment and estimates. The headwind we need to track is the weakening of internal sentiment. If internal sentiment falls too sharply, it would offset the easing of macro concerns.
Though internal earnings sentiment for all sector groups dropped, Deep Cyclicals have seen the greatest deterioration, especially sentiment around supply chains and capacity production. Earnings revision for the S&P have been positive over the past few weeks, but Deep Cyclical revisions were weak heading into reporting and have deteriorated since. That suggests embedded fundamental headwind for Deep Cyclical names even as the overall macro backdrop has rebounded.
Deep Cyclicals Earnings Outlook Lagging Other Groups: 4Q earnings releases are starting to ramp up (~25% of S&P names have reported so far) and there is an interest divergence in expectations. According to our survey work (HERE), almost all (92.5%) of the investors expect a neutral or positive market impact from 4Q earnings. The median estimate for 4Q EPS growth is for a better than consensus estimate. BUT ~30% of respondents think other people are looking for a negative market reaction. The bottom line, applying the surprisingly popular method described in the abstract HERE, the conclusion remains tilting towards a neutral/positive reporting season return.
So far, early reporters have been in line with the survey expectations. ~82% of reporters beat EPS estimates, and 68% beat on revenue. Both readings are higher than normal, and growth estimates have been revised higher. So far, beats have been rewarded less than usual, while miss returns have been mixed. We expect beats will have a better than normal beat miss skew as macro concerns that restrained some stocks coming out of 3Q reporting fade.
Defensives have the highest beat percent with an 86% beat rate, but the n is small (21). Also, most of the Defensive beats are in the 0-5% range, which isn’t typically enough to generate excess performance. Early Cyclicals have a lower bear rate (79%), with ~3x the number of names reported. There have also been a larger number of large beats within Early Cyclicals. The takeaways are 1) beat rates are high across groups, and 2) Cyclicals in general have had more of the large beats that tend to lead to outperformance.
EPS sentiment has been moving higher, recovering from its 3Q decline. The biggest headwind in 3Q were macro concerns, so the improvement in sentiment is consistent with the generally better than expected macro data released over the past couple of months. In addition, NTM EPS estimates have been trending higher, which is strongly correlated with earnings sentiment trends.
We break earnings sentiment into two groups, external earnings sentiment (macro influenced) and internal earnings sentiment (company specific, long-term charts HERE). That distinction is useful during periods of macro recoveries like we are in today. Firm macro trends should reduce management negativity overtime, resulting in an upward bias to sentiment and estimates. The headwind we need to track is the weakening of internal sentiment. If internal sentiment falls too sharply, it would offset the easing of macro concerns.
Though internal earnings sentiments for all sector groups dropped, Deep Cyclicals have seen the greatest deterioration, especially sentiment around supply chains and capacity production. The increase for Deep Cyclicals external earnings sentiment was also the lowest among all three groups. That suggests embedded fundamental headwind for Deep Cyclical names even as the overall macro backdrop has rebounded.
Earnings revision for the S&P have been positive over the past few weeks, rebounding from an unusually low level at the start of reporting (more HERE). Again, Deep Cyclicals is a source of weakness though. 4Q Deep Cyclical revisions were weak heading into reporting and have deteriorated since, which is aligned with sentiment deterioration. Deep Cyclicals have performed better as growth data has beat, but the fundamental underpinnings for the group are a concern.
More than 20% of the S&P names will report next week, including 5 mega cap Tech names. Below we list the names meeting strong earnings Quality and earnings sentiment criteria reporting next week. Our earnings beat Swap (bbg MS22BEAT Index) is currently tradable based on the idea.
The names with increased/stable internal earnings sentiment and low external earnings sentiment in 3Q that are reporting next week are listed below. The external earnings sentiment rebound Swap (bbg MS22INEX Index) is filtered for same criteria to benefit from macro rebound.
