With 111 companies in the S&P 500 offering guidance for 1Q14 so far, the S&P 500 (INDEXSP:.INX) is already on track to have the highest number of companies issuing negative EPS guidance since at least 2006, with 93 (currently 84%) coming in below consensus expectations, but that hasn’t stopped investors from rewarding companies these companies all the same.
“If 93 is the final number of companies issuing negative EPS guidance for the quarter, it will mark the second highest number of companies issuing negative EPS guidance since FactSet began tracking guidance data in 2006,” writes senior earnings analyst John Butters in a March 31 FactSet report.
Negative EPS guidance worth a 0.2% price gain
Despite what looks like bad news, the average gain for companies issuing negative guidance is 0.2%, compared to a five-year average of -0.8%, while the average bump for companies guiding higher than consensus is 3.6%, compared to a five-year average of 3.0%. While part of this can be attributed to the overall bullish sentiment of the market, it also reflects the fact that surprise factor is actually less than in recent years – average guidance has come in 6.7% below guidance compared to the five-year average of -10.8%.
The implication is that while consensus EPS estimates are high for a larger number of companies, they are also closer to the mark than they have been previously, and investors may have been expecting EPS guidance to come in even lower against consensus.
Consumer discretionary has the most disappointing EPS guidance, seeing both significantly more companies offering negative guidance and fewer offering positive guidance compared to the five-year average, followed by IT and health care.
Revenue guidance has improved this quarter
EPS guidance for the current fiscal year has followed a similar track, with a spike in negative guidance, but this seems to follow a trend of companies starting the year with relatively high levels of negative guidance.
“Since the end of December, the number of companies issuing negative EPS guidance for the current fiscal year has increased by 36, while the number of companies issuing positive EPS guidance has decreased by 53,” writes Butters.
Revenue guidance has come in more evenly, with 40 companies giving negative guidance for 1Q14 and 34 issuing positive earnings guidance. If that rate holds up, it will be the lowest percentage offering negative revenue guidance (54%) and the highest percentage offering positive revenue guidance (53%) since 2011.