Earnings Estimates Are Bad — Here’s Why that’s Good!
It’s a new month and the start of the third quarter.
This means profit-reporting season will soon be upon us once again. Earnings estimate revisions have gone from bad to worse.
But it may surprise you to know…
Lower Earnings Estimates Are Actually a Good Thing
First the hard numbers: According to FactSet data, estimated earnings for the just-ended second quarter have fallen by 2.5% since March 31.
Additionally, 87 companies in the S&P 500 have reported negative EPS guidance, with only 26 companies issuing positive guidance so far.
That’s the most lopsidedly negative surprise ratio since 2016.
Wall Street’s consensus forecast calls for a year-over-year earnings decline of 2.6% for the second quarter. This would mark the first time the S&P has reported two quarters in a row of declining earnings since 2016.
Six sectors are forecast to report year-over-year earnings growth, led by Utilities (+2.2%) and Health Care (+2.1%).
But five sectors are projected to report a year-over-year decline in profits, led by Materials (-14.4%) and Technology (-11.9%).
Now, here’s the silver lining…
Why Bad Is Apparently Good for Stocks
Downward earnings revisions create sour sentiment heading into earnings reporting season, but they also lowers the bar, making it easier for companies to step over them and report positive profit surprises when reporting actually begins.
In fact, when earnings revisions are this negative, history shows us stocks often perform well.
Most earnings results will be reported in July, with some trickling into August. This means more good news from a seasonal perspective.
Over the past decade, July has been one of the best-performing months of the year for stocks, says Bespoke.
The S&P 500 has posted median gains of nearly 3% in July since 2009 and has moved up 80% of the time.
Meanwhile, the Nasdaq has surged an average of 4.4% higher and moved up 100% of the time during July.
Bottom Line: Don’t stress out too much over earnings reports revisions.
Stocks have sentiment and seasonality on their side right now.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch