For all the talk about how “great” this earnings season has been in the U.S., at least one well-known strategist sees a problem.
In a note dated Monday, BofAML’s Savita Subramanian observes that although companies which have failed to live up to expectations have been taken to the woodshed, those that have managed to beat on both the top and bottom lines haven’t been rewarded.
Companies which missed on EPS and sales have been summarily punished – negative 3ppt alpha versus the S&P over the subsequent one and five days, more than the historical avg. underperformance of 2ppt. Punishment has been greatest in Tech, which is extremely crowded by active funds.
But companies which beat on top and bottom line have produced no alpha over the next one and five days.
How unusual is that, you ask?
Well, it hasn’t happened since the tech bubble:
“Also unnerving,” Subramanian goes on to write, is that “prior to the current quarter, the smallest reward for beats coincided with the 3Q07 market peak, where beat alpha was a mere 90bp the following day.”
But you shouldn’t worry, because as Bloomberg reminds you, “the best returns come at the end of the bull market, with gains in the 12-month period preceding peaks averaging 25%.”
Nothing to see here…