August 04, 2022
Market Snapshot: Is Bad News Good News?
Is Bad News Good News?
- It seems that investors are not reacting to companies’ earnings results in the usual fashion as macroeconomic concerns have taken center stage. So far this year, the S&P 500 has moved inversely to underlying earnings. Until June 17, 2022, when the market reached its year-to-date low, earnings forecasts for the year had been up 2.8%, yet the market fell 22.3%. Since June 17 to date, the market has rallied 12.6%, despite a 1.2% decline in earnings expectations. (Exhibit 1)
- This earnings season, companies that have beaten estimates on both earnings per share and sales have outperformed the benchmark by a cap-weighted average of 2.9%. Surprisingly, companies missing on both metrics have outperformed even more significantly, beating the benchmark by 4%. This is only the fourth quarter since Q3 2003 that companies missing both estimates have outperformed. The other three quarters where companies missing estimates actually outperformed were near recessions (2003, 2009 and 2020), underscoring that investors were distracted by the macro news. (Exhibit 2)
- Many of the companies with earnings misses in Q2 are COVID beneficiaries with a slowing trajectory of earnings. Nonetheless, investors may be more concerned about earnings guidance than other metrics. It could be they are distracted, which amounts to a market inefficiency that should benefit active management. Further, we believe there is also a sense of “bad news is good news” as investors expect the Federal Reserve to treat bad news as an indicator to stop its tightening policy sooner. We do not yet know the impact of Fed tightening on the economy, and the central bank may be “in play” longer than usual due to the inflation conundrum.
The views expressed represent the opinions of certain GIM portfolio managers as of August 3, 2022, and are not intended as a recommendation of any security, sector or product, and any security identified herein may or may not have been bought, held and/or sold by GIM-managed portfolios. Any opinions or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable, but accuracy is not guaranteed. Future developments (including performance) may differ materially from expectations and projections noted herein due to various risks and uncertainties and changes in underlying assumptions.