As expected, earnings season has been mixed so far. With about one quarter of the S&P 500 companies having reported, revenue growth for the index is expected to be 11.2%, and earnings growth is expected to be 6.0%. Of the companies that have reported, about 60% have exceeded expectations. However, that is lower than the historical average. Additionally, a much higher than normal proportion of companies have announced lower expectations for future quarters, which we expected. Yet the stocks of companies that have missed earnings expectations have not declined nearly as much as in prior quarters (all preceding data from Credit Suisse and Factset). This is a sign that some amount of bad news is already reflected in market prices. We will continue to watch the data closely over the coming weeks.
Earnings estimates for future quarters have started to decline, and that is likely to continue. Downward revisions raise the risk of lower stock prices. Looking under the surface at the health of the market, our indicators still fall short of declaring an “all clear”. Risk is still high, and we are holding cash for clients for this reason. However, our process does suggest that the end of this decline is fairly near. We will continue to monitor our indicators and keep you informed as the market evolves.
