Wall Street Mood Monitor:
Earnings and Sentiment Sever Ties

For much of 2017, corporate earnings and Wall Street sentiment enjoyed a happy, healthy relationship. Consider the honeymoon over. Corporate earnings trounced expectations again this quarter, but Wall Street analysts just aren’t viewing those results through the same love-struck eyes.

At 361 Capital, several of our strategies track analyst earnings estimates to predict how their future expectations of a stock will change. As a byproduct of that process, we keep many statistics on analyst earnings estimates and corporate earnings results and share those findings in our quarterly Wall Street Mood Monitor. The decoupling between earnings strength and analyst sentiment was one of the most notable changes this period.

Skipping Together Hand in Hand

In the first half of the year, corporate earnings and Wall Street sentiment (which we measure by the amount of positive and negative revisions to analysts’ earnings forecasts) seemed happily wedded. As a greater percentage of companies significantly topped their consensus earnings expectations, Wall Street analysts’ icy outlooks thawed. In March, the percentage of upward analyst revisions began to consistently exceed downward ones for the first time since 2011.

In the second quarter, the relationship between earnings strength and analyst sentiment reached a crescendo. That quarter, 55% of stocks beat consensus estimates by more than one standard deviation, which was the highest percentage of significant earnings beats witnessed in 15 years of collecting such data. Conversely, only 12% of companies reported one-standard deviation earnings misses, the lowest level since 2010.

With earnings trends strong, sentiment soared. On a rolling three-month basis, second quarter revisions were the strongest since the spring of 2012.

It’s Not You, It’s Me

In the third quarter, earnings trends remained strong; fifty-four percent of companies beat their consensus estimates by at least one standard deviation during the third quarter, only a touch lower than the record 55% set in the prior period.

The number of companies reporting substantial earnings misses, meanwhile, remained low. Only 13% of companies announced one standard deviation misses, which is still near record lows set in 2010.

But Wall Street analysts lost their loving feeling. The ratio of positive and negative estimate revisions was almost neutral in July and August. Downgrades then increased considerably in September. For the last month, 55% of total Wall Street analyst earnings revisions were negative, marking the highest level of pessimism since June 2016.

Permanent Mood Change?

Analyst sentiment often isn’t fickle. 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. Early this year sentiment was trending positive again, as earnings toppled consensus forecasts and analysts increased their expectations. The fourth quarter may give clearer indication of whether September’s sentiment shift was a mere blip in forecast changes, or a more permanent mood swing.

Read our complete Wall Street Mood Monitor for 3rd quarter.