Equities: "US Earnings Season Was Above Average"

From Upfina, May 7:

Sometimes investors get confused about how earnings affect stocks. Stocks trade based on future earnings expectations. The latest earnings report gives us the best clue as to how that future will turn out. Analysts make their estimates based on company guidance. That’s why changes to analysts’ forecasts correlate with stocks. Some inexperienced investors might be confused why stocks usually rise while estimates fall. Estimates start high and meander lower. If they fall at a slow pace or rise (which is rare), it’s good news; if they fall sharply, it’s bad news. Saying stocks should fall because estimates fall would be the same thing as saying stocks should rise because estimates are beaten. Both are incorrect. Aggregate estimates are almost always beaten. Companies usually give “beatable” guidance.

You need to know how the game is played to understand the results. The final mistake investors can make is believing high, long term future estimates. It’s not a positive if earnings estimates 12 months or further in advance are optimistic because they are usually strong unless the economy is in a recession. Analysts often start with a base case scenario of about 8%-10% growth and work from there. When comps are high, estimates are lower and when comps are easy, estimates are higher.

The first two months of 2019 were rare because estimates crashed the most in 3 years, but stocks rose. Investors ended up being correct as Q1 has been a good earnings season. We know it has been a good earnings season by the changes to Q2 estimates. As you can see from the chart above, Q2 estimates fell 1% in April. Q1 estimates fell a dramatic 4.6% in January. The Q2 decline is less than average. The average decline in the first month of a quarter in the past 5 years is 1.7%. In the past 10 years, the average decline is 1.4% and it’s 1.8% in the past 15 years.   

Mixed Senior Loan Officer Survey
We discounted some of the weakness in the Federal Reserve’s Senior Loan Officer Opinion survey in January because that was a highly uncertain time. Financial conditions were tight as there just was a mini-bear market. Plus, there was a government shutdown underway. Now we have results from Q2 when the government was open and financial conditions were loose. This report was mixed, as it may have been helped by improved financial conditions, but hurt by the Fed’s rate hikes last year. Some of the surveys are consistent with the Q1 GDP report which showed real final sales growth to domestic purchasers was the worst in 6 years.

First, we have information on commercial and industrial loans. The net percentage of domestic respondents citing tightening lending standards for large and medium firms fell from 2.8% to -4.2%. For small firms, it fell from 4.3% to 0%. Keep in mind, fewer seeing tightening standards is a good thing. We saw the net percentage of respondents increasing spreads of loan rates over banks’ cost of funds fall. This reading was helped by the loose financial conditions. For large and medium firms, the net percentage fell from 4.2% to -27.5% which is a huge decline. For small firms, it fell -4.4% to -14.7%. Declines are good news here.

Finally, as you can see from the chart below, the net percentage of domestic respondents reporting stronger demand for C&I loans fell. The decline was mostly in large and medium firms as it went from -8.3% to -16.9%. For small firms, it went from -10.1% to -10.3%. Here a decline is bad news....MUCH MORE