The "Big Show" rolls into town over the next month, as a parade of companies explain their 2012 earnings and predict the future to an army of professional investors and stockbrokers. There will be lunches, dinners and breakfasts every day for nearly a month.
This year the reporting season is shaping up as pure relief from the relentless complexities of the macro-economic environment in Europe, the US and China.
To the chagrin of many stock-picking investors, however, the relief will be temporary and the profit announcements will have less impact than possibly ever before simply because other forces are at work.
Traditionally the "Big Show", or earnings season, is a chance to review and reset your portfolio. Those companies that beat expectations will outperform the market for the next six months, while those that disappoint will become friendless.
More often than not, the general market manages to beat expectations by between 1 and 2 per cent. Expectations from the financial community are low this season, with overall earnings per share growth forecast to come in between 0 and 2 per cent.
The market is also expecting companies to hose down their numbers for next year due to the benign state of the global and domestic economies. Analysts are looking at 10 per cent earnings per share growth for the 2013 financial year, but this could easily be closer to 5 per cent once the earnings season concludes.
While the earnings season will still see individual stocks pop or flop, regrettably it is unlikely to move the overall market. Last week when I mentioned to a large money manager that I thought earnings didn't matter at this time, he almost choked on his cappuccino.
The reality is the pervading world economic climate will quickly assume control of stock prices once the earnings parade is finished.
The dramatic move in world equity markets last week when the European Central Bank president, Mario Draghi, declared everything possible would be done to keep the euro together, was stark evidence of this.
Another factor weighing against equity markets is seasonality history. According to the analyst Andrew McCauley, August is, on average, the third worst-performing month since 1950 on the US stock market with an average return of minus 0.04 per cent.
Compounding the gloom is September, which is the worst month with a return of minus 0.57 per cent over the same period. In Australia over the past 20 years, August has been the poorest performing month at minus 0.78 per cent while September comes in third-worst at minus 0.33 per cent.
These historical averages dovetail with the fact that all bear markets end with a final desperate plunge, followed by a brutal bounce. Thus forming the classic v-shape bottom.
There are predominantly two drivers of share prices - earnings and value. In bear markets investors tend to ignore the former because they become so pessimistic about the future.
At the top of the cycle the Australian sharemarket was trading on a price to earnings multiple of about 18 times forecast earnings. It is now sitting at about 11.5 times and, if previous bear markets are any guide, will fall to sub 10 times. In other words, much of the downdraft has taken place but there is more to come.
Investors, though, should not be flippant about the upcoming earnings season. The set of numbers about to be printed by Australian companies may not move the dial immediately but they could well be the last value signpost before the market bottoms and, at last, turns higher.
Frequently Asked Questions about this Article…
What is the earnings season (reporting season) and why should everyday investors pay attention?
The earnings season is when a parade of companies report their 2012 results and talk to investors and brokers. Traditionally it’s a chance to review and reset a portfolio — companies that beat expectations often outperform for the next six months, while those that disappoint can struggle. This season may offer some relief from global macro worries, but its ability to move the overall market could be limited.
Will the upcoming earnings season move the overall market?
According to the article, it’s unlikely to move the overall market much. Individual stocks can still pop or flop after results, but global macro forces (Europe, the US and China) are expected to assume control of stock prices once the earnings parade finishes, so the broader market impact may be muted.
What are analysts forecasting for earnings per share (EPS) growth this season and next year?
Expectations are low this reporting season, with overall EPS growth forecast at around 0–2%. For the 2013 financial year analysts are looking at roughly 10% EPS growth, but the article notes that figure could easily be revised down to closer to 5% once the season concludes.
How much do companies typically beat earnings expectations and what does that mean for investors?
More often than not the market manages to beat expectations by about 1–2%. Historically, companies that beat expectations tend to outperform for months, but the article cautions that in the current environment that outperformance may be less powerful because macroeconomic issues are dominating market direction.
Are there seasonal patterns investors should know about for August and September?
Yes. Seasonality history weighs against equities: since 1950 August has been the third worst month in the US (average return about -0.04%) and September the worst (about -0.57%). In Australia over the past 20 years August has been the poorest month (around -0.78%) and September the third-worst (around -0.33%).
What role do earnings and value play in driving share prices, especially in a bear market?
The article highlights two main drivers: earnings and value. In bear markets investors often ignore earnings because of pessimism about the future and focus more on value. The Australian market’s price-to-earnings multiple has fallen from about 18x at the top of the cycle to roughly 11.5x and could drop below 10x if past bear-market patterns hold.
Could this earnings season be the last value signpost before the market bottoms?
The article suggests that while the imminent company numbers may not move the market immediately, they could be the last value signpost before the market finds a bottom and begins to turn higher — so they remain potentially important for timing and valuation-aware investors.
How should everyday investors approach the reporting season given the global economic risks?
Investors shouldn’t be flippant: pay attention to individual company results but keep in mind that global economic developments will likely dominate market direction after earnings season. Use reported numbers as part of your valuation analysis and be mindful of seasonality and broader macro risks rather than expecting earnings alone to drive the market.
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