Have you been busy buying up the closest out of the money, one-month calls five days ahead of earnings and methodically closing them out the day after results?
If so, you’ve logged an average gain of 88% this earnings season, so, you know, take a break and go to Jamaica like Albert Edwards, or treat yourself to a Huracán or something.
“This has been the best quarter for investors to buy calls ahead of earnings on record”, Goldman writes on Thursday, before noting that the 88% stat mentioned above is “far above the 20 year average” which, as it turns out, is just 11%. Have a look at this:
Of course that’s a bit deceiving. As Goldman goes on to write, you have to think about that in the context of the broader move in stocks. After all, the S&P is up nearly 9% YTD.
Goldman attempts to control for this by looking at realized earnings “less a beta-adjusted sector move” – so, they’re looking at a residual. Even accounting for that, earnings-related volatility has been “impressive”, the bank observes.
Specifically, Goldman finds that “after controlling for sector betas, the average stock realized a +/-3.9% move on earnings – suggesting that macro has played a small role in single stock moves on earnings for the S&P500 overall (c. 10%). ” Adding that impact back, you get to an average +/-4.3% move on earnings day this season, broadly inline with Q3 and among the highest reads since the crisis.
Meanwhile, BofAML is out with the usual snapshot of how top and bottom line results have stacked up to expectations – this is of course in the context of lowered bars.
“So far, 60% of companies have beaten on EPS, 53% on sales and 37% on both”, the bank writes, in a note dated Wednesday, adding that “this is in line with the long-term average (since 2000) for top- and bottom-line beats, but the lowest at this point of earnings season in four years.”
BofAML goes on to deliver their own breakdown of stock price reactions.
Right off the bat, the bank notes that “low expectations [are] evident” in the observed market moves. Specifically, the bank says that “EPS and sales beats have outperformed by 2.5ppt the next day, which (if it persists) would be the biggest reward since 3Q15”. More to the point, that would be the biggest reward since the quarter during which the yuan devaluation rocked global markets.
Meanwhile, misses have only underperformed by 1.3ppt. That’s well below the historical mean of 2.4ppt.
Clearly, guidance has been in focus this season as dramatic guide downs from bellwethers have spooked investors despite the YTD, Fed-induced risk asset force-in.
On that score, BofAML’s 3-month guidance ratio (so, the ratio of above-consensus vs below consensus earnings guidance) has fallen to 0.75, the lowest in nearly two years. But as you can see from the chart, it’s still well above the historical mean.
The bank also flags risks to capex plans from the usual suspects (e.g., the trade wars, gridlock inside the Beltway, growth headwinds).
Ultimately, one is left with the same impression as before – and I think Morgan Stanley’s Mike Wilson might have mentioned this at some point, but I can’t find it right now. It seems likely that the real impact of slowing global growth, trade uncertainty and domestic political turmoil won’t show up until Q1 2019 results.
That may be the real litmus test and assuming the YTD rally has legs, any disappointments when we start to get Q1 results will be set against a backdrop of buoyant risk assets, a rather tenuous scenario.
But that’s just speculation. As Trump would say, “we’ll have to see what happens.”