Earnings Impress, but Wall Street Sentiment Falters

Companies are shattering earnings expectations at a record clip…but Wall Street analysts appear skeptical the trend can continue.

The decoupling between earnings strength and Wall Street analysts’ sentiment was the most notable change in 361 Capital’s Second Quarter Wall Street Mood Monitor, a three-factor model measuring earnings trends, Wall Street analyst sentiment and stock correlations.

By some of our Mood Monitor’s metrics, corporate earnings trends have never been stronger. Fifty-seven percent of Russell 1000 stocks beat consensus estimates by more than one standard deviation this quarter. This was the highest rate since 361 Capital started tracking such data 15 years ago. Conversely, only 11% announced earnings one standard deviation below consensus expectations, the lowest rate since 2010.

Put together, the gap between the number of companies reporting significant earnings beats and significant earnings misses is at its widest margin in 15 years.

Strong earnings haven’t been enough to buoy Wall Street sentiment, however. We gauge Wall Street sentiment by comparing the total number of upward and downward revisions to all sell-side analysts’ corporate earnings estimates. Upward revisions dropped significantly this quarter.

Only 53% of all earnings revisions were upward in June, the lowest level this year. The drop marks a significant change from the start of 2018. In January, 74% of analyst earnings estimate changes were upgrades, a record level for the last 15 years. Upgrades continued in February and March, as analysts continued to factor in the benefits of corporate tax reform, but the level of upward revisions dropped substantially over the last three months.

At the sector level, energy, utilities and real estate were the only sectors experiencing an increase in their net revision ratio by the end of the quarter. The consumer staples sector had the highest percentage of downward revisions.

Up Next?

The next few quarters will indicate whether the shift in analyst sentiment is merely a blip, or a longer-term attitudinal shift. For example, in the third quarter of 2017 analyst sentiment dipped despite generally strong earnings trends, but then quickly rebounded.

Often, pessimistic or optimistic sentiment endures. From 2009 to 2011, the amount of upward earnings estimate revisions topped negative ones nearly every single month. On the other hand, estimate revisions were largely pessimistic for a two-year period from 2014 through 2016.

At minimum, the data suggests companies may have to continue delivering record-setting results to change analysts’ disposition.

Each quarter, the Wall Street Mood Monitor assesses the current climate for active management based on three factors: correlations, sentiment and earnings trends. For more details on the current backdrop, read our full report.