Goldman’s ’25 Ideas For Earnings Season’ & Why Index Moves No Longer Matter

Listen, if you haven’t been able to capitalize on a universe of compelling event-driven opportunities in US equities, then that’s your problem.

It’s certainly not the fault of Goldman’s John Marshall and Katherine Fogertey.

Because they’ve been doing “God’s work” about once a week – where “God’s work” means sniffing out ways for you to make some money either with cheap options or with trades around things like earnings and preannouncements.

If you’ve missed out on these opportunities, it’s probably too damn late for you, but on the off chance you can find any recos that haven’t expired (and “expired” could be taken either figuratively or literally there, depending on the trade) you can go back and check out these posts:

Anyway, John and Katherine are back on Wednesday and do you know what they’ve got for you?

Well, I’ll tell you: they’ve got “25 differentiated ideas ahead of earnings.”

25! That’s 5 more than 20. And 7 more than 18. And if they had 4 times that number of ideas, they’d have 100.

So the way they do this, is they get together with their colleagues and identify companies where Goldman is furthest away from the rest of the Street and where they think shares are likely to move.

Specifically, Goldman “sees potential for upward earnings revisions to drive upside in ALB, DE, MGM and NVDA shares and downward earnings revisions to drive downside in SHAK, SPR and EXPE shares.” Here’s the full list:

Ideas

But sarcasm aside, John and Katherine do note something that you should be aware of. Namely that “the underlying drivers of stock returns have changed significantly over the past year.” To wit:

Index moves explain half of what they used to, Sectors more

Over the past 10 years, moves in the S&P 500 index could explain 40% of the daily return of individual stocks; adding each stock’s corresponding sector index to the regression equation, one could explain 50% of the daily returns on average.

This simple performance attribution over the past two quarters reveals that the SPX has explained only 18% of single stock returns on average and when combined with the sector return, they only explained 37% of the daily returns.

Implications: When a stock’s correlation to the index is low, beta is less useful as a measure of risk. We find investors are increasingly seeking alternative measures such as implied volatility, implied moves, or factor decomposition as they analyze the drivers of their portfolio.

Relative to the index, sector returns have become more important; knowing your beta to the sector was just as important as knowing your beta to the market for explaining stock returns over the past year.

MacroNoMo

Obviously, that speaks to a lot of the trends we’ve seen this year and underscores quite a bit of the commentary you’ve read here and elsewhere over the past several months.

Finally, for those who don’t care about the bigger picture and are just looking for a trade, Goldman reminds you that earnings day moves are now 4X average daily moves – that’s the highest on record:

EarningsDayMoves

You should note that beyond being a fun factoid you can use to trade on, that speaks to the point about how suppressed macro vol. has created an environment where average daily moves are reduced to nothing – the pond is still outside of earnings days.

Oh, one more thing: Goldman adds that Discretionary and Info Tech (surprise!) earnings day moves are “the highest on average and relative to history”:

GSTechEarningsDayMove

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