Looking Ahead Through Earnings Season

Looking Ahead Through Earnings Season

The unofficial start to the fourth-quarter earnings season starts today with the big banks, who usually kick things off.

According to Factset, bank earnings are expected to be off 15% from the same quarter last year. Higher interest rates have been good for the banks, but the decline in mortgage financing will take a chunk out of the bottom line.

In our experience, negative bank reports can drag on market prices in the short term – even if the bad news is priced in.

Here’s what we mean…

Earnings and Sentiment

Average earnings across all sectors will be more important to watch over the next few weeks.

The early reports have been mixed but positive overall. Based on the information available to us right now, we expect earnings to be down -3-5%, but revenues will be up by nearly the same amount.

Remember that the market is already pricing in a mixed earnings season. The fact that analysts’ expectations are at an extreme low isn’t a bad sign either. Extremes in negative expectations are usually followed by a flat or positive market in the short term. A situation like this is a good contrarian indicator.

From a technical perspective, we think support on the S&P 500 in the 3,800-3,900 range will hold, and we should look to add risk to the portfolio at those levels, but trendline resistance near 4,000 is going to be tough to break.

In other words, we think the market’s current channel will remain through January.

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What About the Rest of the Year?

Around this time each year, we get a lot of questions about whether January is a good guide for the next 11 months. If we think earnings will be low and the market upside is limited in January, does that mean it is less likely to see gains over the following 11 months?

The so-called “January barometer” is based on this idea and has been making its annual reappearance in all the financial outlets lately. Unlike many seasonal-based investing ideas, the January barometer appears to have a very slight predictive edge.

If we go back to 1950, a negative January led to negative returns for the rest of the year 35% of the time. That’s higher than using any other month in a random sample, but not by much. However, we think the historical study is irrelevant because today’s market can’t be compared to previous decades that included a quasi-gold standard and a more hands-off Fed.

For example, of the most recent 11 negative Januarys, only two were followed by negative returns the rest of the year. Avoiding the market after a negative January would have missed the 35% rally in 2009 and the 28% rally in 2021.

Although our outlook for January is neutral, we think market conditions are still good enough to allow for a rally later this year – even if January isn’t great.

Bottom Line

Earnings from the big banks released this Friday will be low. However, because the market already expects a decline, we don’t think this presents a real issue for support. Sentiment appears to be overextended to the downside, which means rallies off the dips are likely.

We’ll keep you posted as earnings season moves forward.

Enjoy your long weekend.


John and Wade

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Article printed from InvestorPlace Media, https://investorplace.com/tradingopportunities/2023/01/looking-ahead-through-earnings-season/.

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