Thursday, February 5, 2015

Watching the Earnings Warnings

As you probably know, heading into earnings season, companies issue guidance reports so investors will know what to expect. So far this earnings season, many more companies have been lowering guidance as opposed to raising it - by a difference of 8.6 percentage points. 

It's not uncommon for more companies to be negative than positive. From 2011 through 2014, we saw negative spreads every single earnings season, with the sole exception of the first quarter of 2014. But a spread of 8.6 percentage points is the worst that figure has been since the depths of the recession, in the fourth quarter of 2008 and the first quarter of 2009.  In other words, companies are issuing negative warnings with more frequency than they have in five years.

That's the bad news. The good news is that investors are still responding well to earnings reports. Since the start of earnings season, according to Bespoke Investments, the average one-day change in reaction to earnings for the stocks that have reported has been a positive 0.43 percent. That's better than most quarters we've seen since the start of the recession.

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