Matt Phillips at the Times wrote an article earlier this week about the positive price reactions we’re seeing from stocks reporting earnings this season, even for companies that aren’t reporting the best of numbers. Expanding on that analysis (which featured some of our work), below are two charts highlighting this trend.
In the first chart, we show the rolling three-month guidance spread for US stocks reporting earnings over the last five years. This chart shows the difference between the percentage of companies raising guidance minus the percentage lowering guidance on a rolling three-month basis. As shown, after peaking above +10 in the middle of last year, the guidance spread has plummeted, reaching -4 as of yesterday. This means that more companies are lowering guidance than raising guidance, and the current reading has moved below the long-term average.
As guidance numbers have fallen, stock price reactions to earnings reports have been soaring. Below we show the median one-day change that stocks experience after reporting earnings on a rolling three-month basis. Over the last three months, stocks reporting earnings have posted a median one-day gain of +0.78%. As shown, that’s the strongest upside reaction to earnings in at least the last five years. In fact, to find a period where the three-month average was stronger, you have to go back to the early months of the bull market following the March 2009 lows. And this is coming as guidance numbers weaken.
It appears as if investors overshot the downside in Q4 2018 and are now rushing to get back in for fear of missing out.