The Most Important Earnings Season In Years?
Growth, Long/Short Equity, Momentum, Macro
Seeking Alpha Analyst Since 2014
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
July 11, 2020
STOCKS – None
MACRO – SPY, QQQ
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Earnings season starts this week, with the major banks set to start the week off and Netflix to finish the week out. It may be one of the essential earnings seasons I can remember, especially given how so many companies did not guide at the end of the first quarter. It seemed that any company that mentioned it saw improving trends saw its stock jump. This quarter isn't likely to be as kind, as companies have time to assess the potential impacts the virus is having on its business and the outlook going forward. I would hope more companies will start providing guidance. I would expect the market would start demanding that guidance.
Earnings trends continue to shows that estimates continue to continue to fall, and the outlook for the second quarter has declined. Data from S&P Dow Jones estimates earnings in the second quarter of $22.37 per share. That is down from $25.55 on April 30, and $34.51 on March 31. (Premium content - EPS Estimates Continue To Slide (with podcast))
(S&P Dow Jones)
How this quarter goes, in an ordinary world, should have an impact on the direction of the market. Meaning, better than expected results should lift stocks, with weaker than expected results sending shares lower. But more importantly, it could shape the outlook for the balance of 2020 and the shape of the earnings recovery curve. Currently, the earnings expectations are still for that "V" recovery.
(S&P Dow Jones)
At this point, expectations are for earnings to fully rebound in 2021 and surpass 2019 results, rising to $161.45 versus $157.12. So for that to happen, we will need to start to see some of those trends begin soon, and that will come in the form of forward guidance. It will give the investors the confidence that a full recovery is in progress. Additionally, some companies should begin to start seeing improving operating margins in the second quarter, especially if they have reduced their labor force. Operating margins fell below 6% in the first quarter, their lowest level since 2010.
(S&P Dow Jones)
Overall, I can't think of a set of quarterly results that come at a more critical time, especially as the Fed's balance sheet continues to contract, as it winds down its repurchase operation and swap line operations. This week was the first full week since September 2019; the Fed had no repo operations. At least from tracking the data, there appears to be a correlation between the repo activity and the market. The relationship is something I have been following very carefully. Should earnings disappoint and the much need liquidity from the Fed continues to slow, then we could have an issue ahead.
It is the primary reason why I feel like this the most important earnings season in years if the rally is to continue.
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