Earnings Strongest in 15 Years, but Analyst Sentiment Soured in the Third Quarter, According to the 361 Capital Wall Street Mood Monitor

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DENVER, October 18, 2018—Despite strong earnings growth among U.S. companies, Wall Street analyst sentiment cooled considerably in the third quarter of 2018, according to the Wall Street Mood Monitor, produced quarterly by 361 Capital, a Denver-based boutique asset manager.

The change in analyst sentiment has been fast and significant. In January, an overwhelming 74% of all analyst earnings estimate changes were upgrades, a record level for the last 15 years that 361 Capital has been tracking this data. While the number of upward revisions dropped significantly in the second quarter, they still outnumbered downward revisions.

In September, however, the total percentage of upward analyst revisions fell below 50% for the first time in 11 months. 361 Capital gauges analyst sentiment by comparing the total number of upward and downward revisions with all sell-side analysts’ corporate earnings estimates.

“With corporations already beating earnings expectations at record rates for two straight quarters, it’s hard to envision what it would take for that sentiment to improve,” said John Riddle, chief investment officer at 361 Capital.

Each quarter, 361 Capital assesses the market conditions for active managers in the Wall Street Mood Monitor, a model gauging the active management climate based on three factors: correlations, analyst sentiment and earnings trends. Two of those factors—correlations and earnings—have been quite supportive. At the end of the third quarter (before October’s sell-off) stock correlations were near 15-year lows established in late 2017.

Additional highlights of the report include:

  • In the 15 years that 361 Capital has been tracking this data, earnings trends have never been stronger. A record 60% of Russell 1000 companies beat consensus earnings expectations by at least one standard deviation in the third quarter, marking the second straight quarter the rate of significant earnings beats reached record highs.

  • Intra-market correlations dropped in the third quarter and are close to record-low levels established in November 2017. The dip follows a first-quarter spike that saw correlations rise above their 15-year average for the first time since mid-2016.

  • Only 11% of companies reported earnings that missed expectations by at least a standard deviation, near the low-water mark of the past eight years. Put together, the gap between companies reporting significant earnings beats and significant earnings misses is close to its widest level in 15 years.

  • Earnings trends also remain strong for most industrial companies, with nearly two-thirds of companies reporting earnings that were at least a standard deviation above consensus estimates.

  • Technology and Health Care sectors enjoyed higher rates of earnings surprises during the quarter. Relative to the sector’s historical norms, the ratio of industrial companies reporting significant earnings beats to those reporting significant misses is near its 15-year high.

  • Analyst sentiment toward consumer discretionary stocks has dropped since the beginning of the year but remains positive, as slightly more revisions (51.5%) were upward than downward (48.5%).

  • Earnings trends within the Consumer Discretionary sector were also positive, with 58.5% of companies reporting earnings that were at least a standard deviation above consensus expectations.

To read more on Wall Street sentiment, or the other factors used to assess the backdrop for active management, read the full Wall Street Mood Monitor report.

About 361 Capital
361 Capital is a leading boutique asset manager. Founded in 2001, the firm offers a suite of actively managed alternative and behavioral-based equity strategies that seek to deliver meaningful alpha, manage risk and offer diversification potential to investor portfolios.

361 Capital is majority employee-owned with strategic investments from Lovell Minnick Partners, a private equity firm, and Lighthouse Investment Partners.

For more information, call 866-361-1720 or visit 361capital.com.

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