U.S. and global stock markets have not been doing well lately. After a promising start to the year, things started to cool off in the late spring, and the summer and early fall have seen markets drop another notch. Company guidance in the form of positive or earnings preannouncements can offer some useful insights into future market conditions, and, in fact, have been spot on lately.
As FactSet Senior Earnings Analyst John Butters highlights in his September 29th report, the trend has been toward a greater number of negative earnings preannouncements by S&P 500 firms over the last couple of quarters as markets have swooned. That trend has finally reversed, however, with positive company pre-earnings guidance having overtaken negative guidance for third quarter preannouncements.
Breakdown of S&P 500 Q3 earnings preannouncements
In the third quarter of 2015, 76 companies produced negative EPS guidance and 32 companies issued positive EPS guidance. If 76 ends up as the final tally for the quarter, it will be the lowest number of firms putting out negative EPS preannouncements since the second quarter of 2012 (72). Moreover, if 32 is the final number of firms with positive EPS guidance for the quarter, it will represent the highest number of firms with positive guidance since the fourth quarter of 2012 (34).
Butters notes that the Information Technology sector has led the way toward positive earnings guidance over the last two quarters. The IT sector saw the largest increase (+6) in the number of companies issuing positive EPS guidance since the first quarter of 2015, but also saw the largest decrease (-6) in the number of firms producing negative earnings guidance relative to the first three months of 2015.
In the third quarter, 19 firms in the IT sector produced negative earnings guidance and 12 issued positive EPS guidance. If it turns out that 19 is the final figure for the quarter, it will be the fewest firms with negative earnings preannouncements in the sector since the first three months of 2011 (17). Given 12 remains the final number of firms with positive guidance for the quarter, this will represent the highest number of companies producing positive earnings guidance in the sector since the first quarter of 2012 (15).
Given the positive shift in earnings guidance among S&P 500 firms, the number of companies issuing negative guidance for the third quarter (76) has now slipped below the five-year average (79), while the number of firms with positive guidance (32) has risen just above the five-year average of 31.