Earnings season has the power to change the trading game.
Four times a year, companies rush toward the earnings confessional to finally reveal their quarterly results and give investors a chance to see whether the company’s plan to expand its client bases, lower costs, improve margins and/or increase income is working.
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Sometimes it’s a shell game, where you are trying to locate the real results amidst all the accounting nonsense.
But beyond what happened the previous quarter, there is another piece of data that companies typically report and, right now, Wall Street isn’t paying much attention to this key data. That’s going to cause problems all too soon for investors…
Waking the Market
Earnings season is in full swing, and I’ll admit that it’s always been one of my favorite times of the year. It’s a time when companies have to lay their cards on the table. We get a chance to sift through all the data and uncover the truth behind all the accounting shenanigans.
And with the data comes a little extra volatility to move stocks sharply higher or lower.
This is a key week for earnings, as 189 of the 500 members of the S&P 500 Index are set to reveal their quarterly results, which should create some waves.
And if results continue as they have, those waves will be lifting the broad market higher. According to FactSet, of the companies that have reported, 70% have announced better-than-expected earnings per share or revenue results.
But while we could see summer end on a high note with positive second-quarter earnings keeping the attention of traders, there are early signs of storm clouds gathering on the horizon, and it could spell rough trading as we close out the third quarter.
The Coming Storm
While investors have largely lifted the shares of companies that have reported strong second-quarter results, they have been studiously overlooking the fact that negative language and guidance cuts have been creeping into the announcements as well.
In fact, we’ve seen the sharpest increase in consensus estimates cuts looking forward since the fourth quarter of 2015, when we were still trying to recover from the Great Recession. Analysts are starting to anticipate weaker earnings to close out 2017.
And companies are giving them good reason to expect a shake-up. While it is still very early in the earnings season, companies across the various industries have issued warnings and slashed outlooks. For example:
- Bed Bath & Beyond warned of “softness in transactions in stores” and higher expenses.
- Homebuilder Lennar cut its earnings-per-share estimate.
- JPMorgan Chase cut its full-year outlook for growth in net interest income.
- Goldman Sachs and Morgan Stanley have both noted a significant slowdown in trading revenue.
- United Airlines has warned that its third-quarter passenger unit revenue is dropping into negative territory.
- Harley-Davidson recently trimmed its fiscal-year guidance, citing U.S. industry challenges, and is cutting 180 jobs.
While positive earnings results for the previous quarter look set to buoy stocks right now, keeping the market trading near record highs, pay attention to the companies’ outlooks for the rest of the year. The party is winding down, and you don’t want to be the last one left holding the check.
2 Tricks for Surviving Rough Trading
Historically, September and October have marked difficult trading periods for the stock market, with indexes frequently suffering sharp losses during those months. There are numerous market pundits and talking heads who are saying that stocks are overvalued and have run too far. They are all searching for that black swan that will topple everything.
Are earnings going to be the death knell for this rally?
Probably not. Both analysts and companies have developed a fantastic smoke-and-mirrors performance to convince investors that bad numbers really aren’t that bad.
But that doesn’t mean we couldn’t see increased volatility this fall that results in some sharp losses as both investors and Wall Street analysts come to terms with the idea that this economy isn’t as rosy as they want you to believe.
You can take steps to protect your portfolio. If you’ve tallied up some nice gains, be prepared to take a little off the table by selling a portion of your position to lock in gains, as Ted Bauman suggests to the readers of his asset protection newsletter, The Bauman Letter.
It also doesn’t hurt to have an expert on your side who is accustomed to navigating Wall Street and its creative accounting. Paul Mampilly is a former Wall Street insider who is now uncovering fantastic opportunities within the mega trends that he has identified that will revolutionize a number of industries. He has specialized in sifting through companies' earnings reports and identifying the key aspects that show when you should buy and when you should sell.
Having experts on your side to navigate future rough trading waters will keep you from sinking your portfolio.
Sr. Managing Editor, Sovereign Investor Daily
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