Now that the latest earnings season is underway, it feels as if it has been ages since the last one.
The season unofficially starts soon after the quarter’s end, as the third quarter did on Friday 11th October when JP Morgan, Wells Fargo, BlackRock and Bank of New York Mellon released their results.
The season runs on until the second week of December, when after a bit of a hiatus, big beasts like Oracle, Adobe, and Lennar finally report their numbers, along with the odd company of interest, such as GameStop.
Individual companies can see their stock price decimated, or even halved, as a big disappointment.
Or, less frequently, some may double on an upside surprise.
But the overall tone for the season tends to be set quite early on. To be fair, the market direction depends to a large degree on the investor sentiment prevailing at the time.
In a bull market, significant misses on earnings and revenues tend to elicit a short, sharp pullback which can often reverse quickly.
In bear markets, significant misses get punished remorselessly, while a strong set of results often don’t get the positive reaction they deserve.
On top of this, the corporations that do best are those who release positive forward guidance for the next quarter and beyond. Those that release negative guidance are often the stocks that get sold off the hardest.
A good place
US equities are in a pretty good place as we start this earnings season.
The Dow and S&P 500 have hit a succession of record highs recently, while the NASDAQ is only a touch below its all-time high from earlier in July.
Granted, volatility, as measured by the VIX, has picked up since the summer lows.
This suggests that while investors continue to ride the bull market, they are also being more cautious than they were in July, say.
Now they are paying up for downside protection, on concerns of a significant pullback.
This seems entirely reasonable. Investors were unnerved in early August when the unwinding of the Japanese yen carry-trade, together with a series of disappointing US economic data releases, culminated in a very poor Non-Farm Payroll report, compounded by a clutch of weak second-quarter earnings reports from some significant tech giants, sent volatility skyrocketing.
Investors will be mindful of the dangers of any earnings disappointments, in particular from the ‘Magnificent Seven’.
Add in the recent uncertainty over the size of Federal Reserve rate cuts for the rest of this year, and the upcoming US Presidential Election, and all this only increases the probability of a major upset.
Be careful
Yet a quick look at charts of the major US stock indices shows quite clearly that we’re in a bull market.
The current leg began almost exactly two years ago when the S&P 500 briefly broke below 3,500.
Since then it has rallied fairly relentlessly, with every pullback subsequently proving to be a buying opportunity.
Will that pattern continue?
We’ll know more before the month-end as the next few weeks bring earnings from Tesla, Amazon, Alphabet, Microsoft, Meta, and Apple.
Then there’s the long wait until the end of November for NVIDIA.
But a feature of the earnings calendar is the tendency for brokers to lower their expectations as the season gets closer.
This has certainly been evident this time around. So, a beat is less significant than usual, while a miss is more.
Time for vigilance, and disciplined risk management.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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