Why 'better-than-expected' might not be good enough for stocks this earnings season: Morning Brief

Sam Ro

·Contributor

Tue, Oct 13, 2020, 2:57 AM4 min read

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Tuesday, October 13, 2020

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Investor positioning and analyst revisions suggest good news may be priced into the market

The big banks kick off earnings season this week with JPMorgan Chase (JPM) and Citigroup (C) announcing their quarterly financial results before the opening bell on Tuesday.

Q3 earnings for the S&P 500 (^GSPC) are expected to come in at $33.30 per share, a 20.5% year-over-year drop reflecting the second largest decline since the financial crisis. But that number is a considerable improvement from the $28.22 per share reported in Q2, a 31.6% year-over-year plunge.

With the stock market having rebounded sharply from its lows earlier this year, expectations are clearly high for companies to show that business bounced back sharply from the pits of the COVID-19 pandemic during Q2. In fact, some of the early reports are actually seeing shares fall despite better-than-expected earnings.

Deutsche Bank strategists led by Parag Thatte chimed in on this in a note to clients published on Friday. They are of the mind that reported earnings will generally be better than analysts expect.

“But positioning suggests less bang for the beat,” Thatte said. “One of the key reasons for the huge rally during the last earnings season was that the strong beats coincided with extremely low positioning (6th percentile going in). Currently however, with positioning near neutral, a strong earnings season will still be positive for the market, but in our reading should have less of an impact than what we saw last quarter.”

Investors have already increased their exposure to equities. (Deutsche Bank)

Morgan Stanley strategist Michael Wilson is also in the camp of market watchers expecting companies to beat expectations in the recent quarter and the quarters to come as operating leverage helps to amplify how much of the sales rebound hits the bottom line.

But Wilson notes that analysts are exactly standing idly by.

“One point of caution is the observation that earnings revisions breadth has bounced back in record time as analysts have scrambled to revise their original forecasts for this recession that were too dire,“ Wilson said in a note to clients on Monday. “We believe this is likely to roll over short term, particularly if a potential passage of CARES2 is delayed until after the election.“

Analysts have been increasing their expectations for earnings. (Morgan Stanley)

The bottom line here is that if you think earnings could exceed expectations and you think that’ll boost stock prices, you’re not alone. And much of those expectations, if not all of those expectations, may already be priced into the market.

By Sam Ro, managing editor. Follow him at @SamRo

What to watch today

Economy

6:00 a.m. ET: NFIB Small Business Optimism, September (101.0 expected, 100.2 prior)
8:30 a.m. ET: Real average weekly earnings YoY, Sept. (3.8% in August)
8:30 a.m. ET: Real average hourly earnings YoY, September (3.2% in August)
8:30 a.m. ET: Consumer Price Index MoM, September (0.2% expected, 0.4% in August)
8:30 a.m. ET: Consumer Price Index YoY, September (1.4% expected, 1.3% in August)
8:30 a.m. ET: Consumer Price Index excluding food and energy MoM, September (0.2% expected, 0.4% in August)
8:30 a.m. ET: Consumer Price Index excluding food and energy YoY, September (1.7% expected, 1.7% in August)

Earnings

Pre-market

6:20 a.m. ET: BlackRock (BLK) is expected to report adjusted earnings of $7.80 per share on revenue of $3.92 billion
6:45 a.m. ET: JPMorgan Chase (JPM) is expected to report adjusted earnings of $2.26 per share on revenue of $28.39 billion
6:40 a.m. ET: Johnson & Johnson (JNJ) is expected to report adjusted earnings of $1.98 per share on revenue of $20.18 billion
6:50 a.m. ET: Fastenal (FAST) is expected to report adjusted earnings of 37 cents per share on revenue of $1.41 billion
7:00 a.m. ET: Delta Airlines (DAL) is expected to report an adjusted loss of $2.93 per share on revenue of $3.14 billion
8:00 a.m. ET: Citigroup (C) is expected to report adjusted earnings of 92 cents per share on revenue of $17.17 billion