The quarterly process of US corporations announcing their most recent earnings reports has for some time been a procession of ‘beats’. Since research agency Refinitiv started tracking the numbers in 1994, a healthy 65% of earnings reports have beaten analyst expectations. In Q1 of 2021, that percentage rose to a staggering 87%.
The celebrations associated with analysts once more underestimating the performance of firms go a long way in explaining the extended equity bull runs seen over the last decade. Earnings beats have become such a Pavlovian ‘buy’ signal that there is a real risk that a series of flops could derail the markets. As US firms prepare to report to their investors, there is a chance that that moment could be now.
Dow Jones Industrial Average 2010 – 2021
The outperformance in Q1 of this year is part of the explanation. The problems associated with Covid, and lockdowns, were bound to take some time to work through the system. Earlier in the year, firms managed to post stellar results partly because expectations were so low, and comparisons to 2020 were always going to come off well, as the Wall Street Journal reported at the time:
“Money managers had by and large predicted that companies would post impressive growth in the first quarter because of easier comparisons against the prior year, when the coronavirus pandemic began disrupting economic activity around the world.”
Starting from that low bar means that as of Q2 and now Q3 earnings season has approached, some investors have begun to worry about when the music will stop.
Market strategist at National Securities and perma-bull Art Hogan shared his concerns about Q3 earnings throwing up some unwelcome surprises. Speaking with CNBC, he said:
“Buckle your seatbelts! This will be the first time in the cycle you’re actually going to hear more companies guide down than guide up.”
Tech firm Snap has already set the mood. Last week it posted disappointing earnings, which dragged the entire Nasdaq index lower. Snap stock is down 27% since its announcement, highlighting the potential for downside on stocks that fall out of favour.
Snap Inc Share Price – March 2020 – October 2021
Snap cited supply-side logistics and reduced advertising revenue as being reasons for the underperformance. There have been some raised eyebrows about the willingness of a ‘camera and social media’ firm to refer to “global supply chain issues and labour shortages impacting our partners” as an issue for their largely virtual products.
It looks like “global supply chain issues” could be a convenient to use buzzword for this round of earnings releases. It would cover a range of complex to detail issues, and while justified to some extent, investors will need to make calls on a case-by-case basis on whether the tag is appropriately applied.
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