Our good friend (and a former boss) Laszlo Birinyi used to hammer home that “it’s all about the guidance!” when it comes to earnings reports for specific companies. That is indeed very true as investors discount stocks based on forward projections more than what they’ve done in the past. On the subject of guidance, this season we’ve been seeing a lot more companies lower guidance than raise guidance, which has resulted in a pretty big tick lower in our guidance spread reading on our Earnings Explorer page (available to Bespoke Institutional members).
Our guidance spread reading shows the difference between the percentage of companies that have raised guidance and lowered guidance over the last three months on a rolling basis. A positive reading means more companies have raised guidance than lowered guidance over the last three months and vice versa for a negative reading. As you can see, the reading is currently at -6.48 percentage points, which is well below the historical average of -2.97. (It’s notable that historically the average guidance spread has been negative, which tells us that in general companies like to under-promise and over-deliver.) The guidance spread completely tanked in the first quarter of 2019 before stabilizing and rallying back during the summer. While it hasn’t been in positive territory all year, the spread did briefly get above its historical average during the Q2 reporting period in July.
A negative guidance reading means companies are less optimistic about the future than they could be, but it’s not necessarily a bearish sign for the stock market. If anything, it gives companies an easier chance at beating estimates going forward as long as the economy doesn’t completely fall off a cliff. As you can see in the second chart below that extends our guidance spread reading all the way back to 2003, the current reading is hardly a negative outlier to be concerned about. The only time the spread really collapsed was in mid to late 2008 in the midst of the Financial Crisis. Want to see Bespoke’s best analysis? Start a two-week free trial to one of our premium plans today.