A trader's guide to the US Q1 earnings season

There is little doubt that Q1 US earnings season is key, especially given the strong run since 11 February. The S&P 500 is clearly in need of a fresh catalyst.

S&P 500 price seems to be moving lower within a bull flag continuation pattern and therefore an upside break of the channel (at 2060) is clearly needed to get a push towards 2080 and onto the May 2015 downtrend at 2095 (highlighted by the red circle).

On the downside, a break of the 7 April low of 2033 would suggest a deeper move into 1975 (the 38.2% retracement of the February rally).

Having spoken to a number of clients in the lead up to Q1 earnings, it feels as though traders are structurally bearish on the market, but many have reluctantly had to reduce bearish exposure due to the strong trend higher. If the market starts to head south, watch short interest as a percentage of total market capitalisation ramp up from 2.7%.

Expectations are once again at rock bottom. It wouldn’t be a surprise to see a similar performance as Q4 2015, where 74.6% of stocks beat consensus on earnings and 46% on sales. The ball really started rolling in Q4 where 83% of the 114 companies who provided guidance missed the street’s consensus. Consensus EPS expectations have fallen since the start of the year and we’re going into the corporate season with the index trading on 16.6x forward earnings – which is hardly cheap but not outrageous either. Market internals have come back somewhat, with 82% of stocks above the 50-day moving average, down from 94% in early April. Around 50% of stocks are rated ‘buy’, which is certainly lower than previous reporting periods.

The market expects aggregate EPS to decline 8-9% year-on-year, which puts earnings on track for a fifth quarterly decline in earnings. The big drag will come from the energy space, while healthcare, materials and telcos should see reasonable growth.

One of the big concerns traders have, which plays into a move through 2033, is that many of the companies who have been buying back stocks are now in a blackout period. This means that the natural buyer of the US market is no longer in the market, potentially lasting through to May. Taking a large bid from the market is never going to be a good thing and would increase the prospect of deeper decline. We know it’s been a tough operating environment in Q1, marked by growth of less than 0.5%, but traders will want to sift through the statement and focus closely on:

  • What will CEOs say about top line growth?
  • How much of an impact has the USD acted as a headwind to sales?
  • Has the recent bid in the oil price lifted confidence?
  • Are there any trends that suggest inflation is likely to push higher?
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