Companies Are Finding It Harder to Deliver
Impressive Earnings

Fewer companies are delivering inspiring earnings results…and it’s not helping the mood on Wall Street.

The drop in companies significantly exceeding earnings expectations and the sour mood that persists among Wall Street analysts were two of the key findings in our first quarter Mood Monitor, a model that gauges the investment climate based on three factors: earnings trends, sentiment and correlations.

To be clear, corporate earnings didn’t slump. They just didn’t impress. We gauge earnings strength by the percentage of companies that beat consensus estimates by at least one standard deviation, which we call an “earnings surprise.” This measurement strips out those companies that top estimates by only a fraction, giving a clearer picture of how many companies are truly exceeding what’s expected of them. That number is slipping.

In the fourth quarter earnings season, 49% of Russell 1000 Index companies delivered an earnings surprise. That’s a healthy percentage, and in line with the long-term average in our 15-years of collecting data. But it’s a 6% drop from the previous quarter, and an 11% drop from the third quarter, when the percentage of companies delivering earnings surprises reached a record high.

That wasn’t the only sign of deteriorating earnings trends. Fifteen percent of companies reported earnings that were at least a standard deviation below consensus expectations. That rate has now crept above the long-term average of 13%.

The less sanguine earnings trends come as investor sentiment – the second factor in our model – remains low.

Wall Street Sentiment Stays Low

We gauge sentiment by comparing the total number of upward and downward revisions to all sell-side analysts’ corporate earnings estimates. By this measure, sentiment has fallen substantially in the last several months. In September, the total percentage of upward revisions fell below 50% for the first time in 11 months. Negative revisions have outpaced positive ones in every month since then. In March, only 45% of analysts’ earnings estimates were upward revisions. But that percentage offered a small bit of hope: While negative revisions still surpassed positive ones, the ratio between the two at least improved relative to February.

Stock Correlations Remain a Headwind

The third factor in our model measures stock correlations. As of March 31, intra-market correlations stood at 0.60, a drop from 0.64 at the end of 2018, but above the long-term average of 0.55. Correlations remain high because many of the geopolitical uncertainties that sent markets sinking and correlations spiking in the fourth quarter persist.

Higher correlations imply that individual stocks are being viewed more as a commodity and that individual, stock-specific characteristics matter less to investors. High correlations normally correspond to difficult environments for active managers.

To read more, including the view at the individual sector level, read our full Wall Street Mood Monitor report >