Negative EPS Guidance Falling For Second Consecutive Quarter

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It’s still early, but so far it looks like EPS guidance is continuing to improve with more companies issuing positive guidance and the negative guidance having a lower surprise factor. 84 companies in the S&P 500 (INDEXSP:.INX) have offered negative 2Q14 guidance and 27 have issued positive guidance, reports FactSet analyst John Butters. That’s still above the five year average (76% versus 66%) but it’s the lowest point since the end of 2012 and an encouraging sign that two years of corporate pessimism has turned around.

S&P 500 companies issuing positive EPS guidance

“Since hitting a peak in negative EPS guidance in Q4 2013, companies in the S&P 500 have issued fewer negative EPS preannouncements and more positive EPS preannouncements for the second consecutive quarter,” writes Butters. “If these are the final numbers for the quarter, it will mark the lowest number of negative EPS preannouncements since Q4 2012.”

sp500 neg pos EPS guidance 0714

Surprise factor is low, investor reaction to guidance has been guarded

Both analysts and corporate leaders have an incentive to manage expectations since an unexpected earnings beat is far more welcome than a miss, even if the absolute numbers are the same, so the mostly negative commentary is to be expected. But in addition to seeing more positive guidance, the average EPS guidance for 2Q is only 6.9% below consensus so far, an improvement over the 5-year average of 10.7% below consensus.

Even though guidance is less negative, investors have been responding more cautiously. The average price change, measured from two days before to two days after the announcement, is -1.2% compared to a five-year average of -0.7%. The average reaction to positive guidance has been a 1.2% gain compared to a five-year average 3.0% gain. Depending on your take, you could either interpret this as a market that’s starting to get worried about high stock prices, or simply one that has already priced-in more earnings growth than in the last few years.

Tech, health care have the best EPS guidance so far

With so few companies reporting, a sector breakdown can be misleading. Telecom services has 100% positive guidance so far because we’ve only heard from one company. Of the sector that have at least ten companies reporting, health care and information technology have the highest percentage of positive guidance, 63% and 69% respectively, and it’s no surprise that consumer discretionary has the worst, with 92% negative guidance.

sp500 neg pos EPS guidance sector 0714

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