Weekly Brief: Analysts Have A Good Feeling About This Earnings Season

Weekly Brief: Analysts Have A Good Feeling About This Earnings Season

almost 2 years ago3 mins

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Analysts are preparing themselves for the quarterly earnings season later this month, and you can learn a lot from how their mood has changed in the last few weeks.

🕰 Recap

  • Oil prices shot higher last quarter after Russia invaded Ukraine, setting energy companies up for a windfall
  • That helped send US inflation to its highest in 40 years
  • But eurozone economic activity in March was stronger than expected, suggesting the war might not hit first-quarter earnings too hard
  • Or it did until retail sales data came in weaker than expected last week, as sky-high prices put pressure on consumer spending

✍️ Connecting The Dots

Earnings season – when companies share how they’ve done over the last quarter – kicks off this month. And you can bet investors will be paying attention: this fresh information gives them a chance to update company forecasts and valuations, which can shake up what they buy and sell. Thing is, investors make these assessments all year round – not just during earnings season. And that’s why it’s worth looking at how analyst expectations have changed during a quarter as well.

Analysts usually reduce their earnings estimates during the quarter by an average of 2.5%, but they only cut their forecasts for S&P 500 companies by 0.7% last quarter. That bodes well for their earnings, which are now forecast to have grown by 5% on average versus the same time last year. What’s more, analysts have been increasing their average earnings forecasts for the full year, which matters: analysts typically cut their annual earnings forecasts by 2% during the first quarter of the year, so the bump means investors can feel relatively optimistic about US companies’ first-quarter profits, as well as their forecasts for the rest of 2022.

They can feel especially optimistic about energy companies, which have seen a 32% increase in first-quarter profit forecasts. But they might want to steer clear of industrials and consumer discretionary firms, whose earnings forecasts experienced the biggest drop. That makes sense: slowing global economic growth is knocking demand for industrial products and services, and record-high inflation is putting cash-strapped consumers off spending. Meanwhile, firms in the financials, consumer discretionary, and communication services sectors are expected to show an average quarterly profit decline of 24%, 15%, and 6% respectively.

🥡 Takeaways

1. There’s a lot to think about during earnings season.

Stock prices usually rise if a company reports better-than-expected results, and fall if it comes up short. But it’s not always that simple: a popular trading strategy – “buy the rumor, sell the fact” – aims to buy stocks in anticipation of an update, benefit from the momentum ahead of time, then sell to lock in profits right when the announcement is made. So you’ll need to view the results with three things in mind: what’s expected, how expectations might’ve changed before the earnings release, and whether both those things are reflected in the stock price.

2. The pros aren’t unbeatable.

Before you can so much as glance at breaking news, professional traders will already have used algorithmic trading programs to interpret those headlines and to take any early profit opportunities. But news outlets can misinterpret earnings releases, or fail to give them enough context. So while short-term traders are looking in one direction, you may still be able to find long-term opportunities their algos just haven’t spotted. That’s why you should always try to understand what’s really being said in a company report, and adjust your long-term investment outlook accordingly.

🎯 Also On Our Radar

Data out on Friday showed global prices of food rose by the most on record in March, partly down to the war in Ukraine crimping crop supplies. That, at a time when folk are already up against higher energy prices. So even though average worker pay is rising pretty quickly, most people will still find that their money won’t stretch as far as it used to in the weeks and months ahead.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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