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After The Biggest Pre-Season EPS Cut In Three Years, Here’s What Matters During Earnings Season…

This may be wholly self-evident/tautological, but...

This may be wholly self-evident/tautological, but in light of the contention (parroted across some desks) that the “micro fundamentals will take over from here”, I think it’s worth reiterating.

This is still, generally speaking, a macro-driven market. Admittedly, I’m predisposed to thinking that about all markets, all the time, but as detailed extensively in “Is This A ‘Reflation’ Day Or A ‘Growth Scare’ Day?”, the mood on any given day is driven almost entirely by whether the nascent “cyclical reflation” story is in command or whether there’s been some data point or headline to reinforce the “growth scare” story.

The last four weeks are indicative of that. Late March was defined by the Fed’s second dovish surprise in a row, plunging DM bond yields and an ill-timed manufacturing PMI miss out of Germany that added fuel to fire. Then, the narrative turned on a dime in April, as PMI beats out of China combined with a couple of upbeat prints in the US (ISM and a solid March payrolls report) to lend credence to the “green shoots” story. Finally, on Friday morning, a rebound in China’s export growth and an across-the-board beat on March credit data were seen as tentative “proof” that external demand is improving and Beijing is committed to keeping the proverbial train on the tracks, respectively.

That’s what matters right now, and just to reiterate a point we’ve made at least three times this week, earnings season in the US will be more important for what’s said on calls about the macro backdrop and what guidance tips about corporate management’s outlook of the global economy. Remember, the latest read on the Conference Board survey of CEO confidence betrayed a rather pessimistic take that seems at odds with the still-resilient ISM in the US.

(SocGen, Datastream)

When it comes to earnings themselves, the only question is whether the bar has been set low enough to allow for beats. JPMorgan’s report was a decent start and as BofAML’s Savita Subramanian and Jill Carey Hall note, “1Q expectations have been reset dramatically [as] bottom-up consensus EPS has been cut by 7% over the last three months (to $37.29), more than double the typical 3% pre-EPS season cut.” This is largest pre-season EPS cut in three years.


As you’re undoubtedly aware by now, earnings are expected to fall in Q1 for the first time since 2016, which has given birth to the “earnings recession” story, something we’ve spent a ton of time documenting this year.

Read more about the earnings recession story

Subramanian and Hall go on to note the obvious, which is that lower bars are easier to clear. “The good news [is that] in prior quarters of similarly dramatic cuts, EPS beat expectations in all instances, by an average of 3%”, they write. Here’s a more granular look at things:


While top lines are expected to grow for every sector except Tech and Energy, BofA reminds you that “all sectors except Health Care, Real Estate and Utilities are expected to see a YoY earnings decline this quarter.”

After talking at some length about the relationship between ISM and earnings growth, Subramanian and Hall underscore what we noted above – namely that guidance is what matters. To wit, from the note, dated April 10:

Management guidance trends have generally weakened since mid-2018 amid uncertainty around global growth and trade, where the three-month ratio of above- vs below-consensus guidance for the S&P 500 has fallen to 0.6x (from over 1.0), slightly below its long-term average of 0.7x… We will be watching closely for evidence of a recovery in guidance this earnings season (typically the ratio improves seasonally), which could be a positive catalyst for the market and suggest that estimate revisions are likely bottoming. 

Again, I can’t decide if the general thrust of this is self-evident or not, but what I do know is that, just like every other earnings season, there will be no shortage of commentary from folks keen on parsing company-specific factors/trends while completely ignoring what’s being said/tipped/insinuated about the macro backdrop.

Obviously, that’s warranted in certain cases, but considering the extent to which recent, high-profile guide downs (think FedEx, Micron, Apple, etc.) have been driven by the macro narrative, and when you consider that nearly every day traders wake up to more ostensibly market-moving headlines centered entirely on macro developments (some of which are inextricably bound up with politics), it’s fair to suggest that the importance of guidance and what’s said by top management about how the macro environment is affecting their top and bottom lines cannot be overstated at the current juncture.



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