This earnings season, with companies reporting for the fourth quarter of 2016, was supposed to provide some clarity for a market that seems to be desperately seeking a direction. Once the initial push that resulted from optimism about pro-business policies following President Trump’s election faded around mid-December, the S&P 500 settled into a slightly upward trending narrow range.
Q4 earnings, we were told, would break the deadlock one way or another. Either it would be clear that actual economic growth was picking up enough to justify above average multiples of earnings or, if earnings fell short, we would see a quick retracement to around where the rally began.
So far earnings have only added to the confusion.
As of Friday, according to Factset, 55 percent of S&P 500 companies had reported, and 65% of them had beaten on the bottom line. If that sounds good to you then it is likely that you have not been following earnings for long, as that is exactly what has been happening for years now and 65% is, in fact, below the average for the last 5 years.
Corporate boards have realized that under-promising and over-delivering in terms of their official outlook are better for their share price than being optimistic in their guidance, and Wall Street analysts also err on the side of caution. The investors who are their clients may miss a few opportunities due to the analysts’ caution, but better that than them losing money as a result of an overly bullish call.
That all leads to an inbuilt conservatism in estimates which in turn leads to roughly two thirds of companies beating expectations every quarter. On that basis, earnings so far have been a little below average, leaving traders and investors looking elsewhere for clues. The news elsewhere is not particularly encouraging. Only 52% of companies so far have reported sales in excess of estimates, which is well below the recent average, and twice as many companies have issued negative guidance as have been upbeat about prospects.
That just reiterates that what we are seeing in the stock market now is a battle between those that are looking backwards and saying this is plenty high enough based on economic conditions, and those looking forward to a program of huge corporate tax cuts and deregulation and saying that what happened last year is not the point. In effect then, what earnings so far have told us is nothing new.
That is true with regard to the broad market, but when you break earnings down into sectors there are some clear messages, perhaps the most interesting of which comes from the energy sector.
Actual Q4 results for energy companies were mixed. The French integrated firm Total S.A. (TOT), for example, which reported overnight, beat expectations pretty easily, whereas U.S. rival Chevron (CVX) missed badly a couple of weeks ago. In general, when the sector was strong, it was very strong, with five of the top 10 positive earnings surprises coming from energy companies.
What was most noticeable was the degree of optimism in the industry. Almost every energy company that has reported so far has raised guidance with several, including Total this morning, announcing fairly ambitious plans for expansion this year. After a couple of years of drastic cutbacks, energy looks to be back with a vengeance.
That good news aside, it has been an unsurprising, basically neutral earnings season. As a result, it looks like we are stuck in a rut for a little longer.