It’s earnings season again! Time to binge watch some 10-Q’s being filed on the SEC website. The big banks always begin every earnings season. On Friday, JP Morgan and Wells Fargo set the pace for the season with a top-line (revenue) and bottom-line (net income) beat. This morning both Citigroup and Goldman Sachs missed on the top-line while beating the bottom-line. What does this mean? It means that we are starting out with a mixed bag. However, big banks are not always bellwethers for how the earnings season will progress.
We are paying attention to the guidance that companies give about the remainder of the year. The guidance was particularly weak during the last earnings season.
Companies will miss expectations. The key question over the next couple of weeks is how will the market react when companies miss expectations. Last quarter we pointed out how forgiving the market was. During Q1, companies that missed expectations were hardly punished (see chart below) falling only –0.4% compared to the average decline of –2.5% since 2014. This era of forgiveness will most likely not continue. Will the market revert to normal behavior over the next couple of weeks? That is the question.
We are watching closely for what happens next, and will be ready for either market leniency or punishment. We always prefer market leniency.