September Mood Monitor: Earnings Moderate and Wall Street Pessimism Continues

Corporate earnings cool slightly and the mood on Wall Street is becoming more pessimistic. The 361 Capital Wall Street Mood Monitor assesses the climate for active management based on three factors: earnings trends, sentiment and correlations. The data behind those factors points to a mixed outlook for active managers.

Earnings Thaw Slightly

Earnings reports softened slightly in the three months ending August 31 with the percentage between companies reporting significant earnings beats and those reporting significant earnings misses narrowing. The rate of upside surprises dropped one percent to 52% and the rate of earnings disappointments climbed one percent to 13%.

We gauge the corporate earnings performance by the percentage of companies reporting earnings at least a standard deviation above consensus estimates (an “earnings surprise”) to those reporting earnings a standard deviation below expectations (an “earnings disappointment”).

While the rate of earnings surprises continues to be in line with the 12-month average, it remains more than five percentage points higher than the long-term average.

Analyst Pessimism Continues

While companies’ earnings results moved, a trend that has remained consistent is Wall Street analysts’ chilly sentiment. We gauge sentiment by comparing the total of upward and downward revisions to all sell-side analysts’ corporate earnings estimates.

In 11 of the past 12 months, downgrade revisions have outpaced upgrade revisions with August marking the fourth month straight for negative revisions winning. However, August’s -11% was an improvement over June’s -31%, the biggest gap since January 2016.

Health Care, Communication Services and Real Estate stood out as the only sectors with average revision ratios that didn’t decline from June to August.

Correlations Rise with Global Concerns

The third factor in our model measures sector correlations. Higher correlations signify individual stock characteristics have less consequence while lower correlations signify higher stock specific risks. Higher correlations can cause a headwind for active managers.

Intra-sector correlations moved up to 0.59 at the end of August caused by global growth concerns. This is slightly above long-term averages and an increase over the previous three months.

Increased correlations combined with softening earnings trends and pessimistic sentiment have created a respectable, but not ideal environment, for active managers.

To read more about the investing climate on Wall Street, and take a deeper dive into the Health Care and Communications Services sectors, read our full Wall Street Mood Monitor report >