Upside of December Meltdown Is Best Earnings Rally Since 2015
In the results so far, company profits are coming in worse relative to analyst projections than any time in almost two years.
(Bloomberg) -- If investors are learning anything from earnings season, it’s that last year’s stock sell-off did a lot more to prepare them for it than Wall Street analysts ever could have.
Consider results so far, in which company profits are coming in worse relative to analyst projections than any time in almost two years. But December’s rout in equities was so brutal that stocks are having no problem shaking off that performance to rally the most at this stage of the reporting cycle since 2015.
“Companies that have been so beat up and are trading at really depressed multiples are having an easier time rallying on good or bad numbers,” said Yousef Abbasi, director of U.S. institutional equities and global market strategist at INTL FCStone. “You do see a comfortable dip buyer with the criteria that valuation on the stock looks relatively cheap and numbers are better than feared or comments are slightly better than expected.”
The S&P 500 Index plunged 14 percent between October and December, its worst quarterly decline since 2011. Meanwhile, analysts pared their forecasts for earnings by much less: only 2.2 percent. The differing trajectories has left companies with a bigger margin of error than they usually have.
Futures on S&P 500 rose 0.4 percent as of 7:58 a.m. in New York, poised to extend gains that has lifted the cash index up 3.5 percent since Citigroup kicked off the reason three weeks ago.
Examples abound, Advanced Micro Devices Inc. being the latest. The company reported sales that were about $20 million below analyst estimates Tuesday night while earnings failed to beat forecasts for the first time since the middle of 2015. For the stock, no problem. After falling 38 percent since the end of the third quarter, it jumped 10 percent in pre-market trading.
Apple Inc. can be framed similarly. Its first-quarter earnings of $4.18 a share were a hair above Wall Street’s much-deflated estimates, but the margin of the beat was the smallest since 2016. Nevertheless, the stock jumped, rising as much as 5.8 percent.
It’s not that earnings have been stellar, just that investors have been forgiving. Whirlpool Corp. issued 2019 earnings guidance Tuesday that missed the lowest analyst estimate, initially sliding 6 percent only to reverse those losses and finish up 10 percent, its best day in more than 5 years.
“Things were beat down too far, kind of like a coiled spring,” Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, said by phone. “If you get any decent numbers out there, the market’s going to go higher. These stocks got way oversold.”
3M Co. may have beaten analyst forecasts on the top and bottom line for the fourth quarter, but the company slashed its full-year profit forecast. Still, the industrial firm’s shares rallied almost 2 percent. And although Caterpillar Inc. plunged Monday after the bellwether’s biggest quarterly profit miss in at least a decade, the selling was limited to a single trading session.
“We are in the silly season: quarterly earnings,” Nancy Tengler, chief investment strategist at Tengler Wealth Management, wrote to clients Tuesday. “And, as though we turned a page on last quarter’s earnings book, this quarter, bad is sometimes good and good is sometimes not good enough.”
To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net;Sarah Ponczek in New York at sponczek2@bloomberg.net
To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Chris Nagi, Richard Richtmyer
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