How To Approach Q4 Earnings: The Corporate Perspective

Even as the 2019 market attempts to shake off last year’s volatility, the incoming earnings season stands to disrupt traders best efforts to restore normalcy.

Because earnings tend to be a trailing indicator, reflecting a company’s health and financial strategy anywhere from 3-6 month prior, there can be a lot of mixed signals about what to pay attention to. On top of that, a lot happened in the last six months of 2018, and the economic outlook for businesses in the U.S. has shifted wildly several times over.

That’s where corporate guidance and revenue estimate adjustments come into play. The changes to quarterly and annual forecasts provide a sense of how accurate each company’s performance estimates were compared to its actual revenue statistics.

The Corporate Perspective

Aside from the collective panic of Wall Street, the tumult of 2018’s market-moving headlines might have had no greater impact than it did among corporate boardrooms. The results of this year’s Duke CFO Global Business Outlook survey show that 84.2 percent of the 500 global CFO’s surveyed predict a recession sometime in 2020, while 48.6 percent believe one will hit before the end of 2019.

Whether this is a true portent of leaner times or simply the overactive imagination of corporate money men, the feeling of an impending recession has already rooted itself into the executive rooms of the world’s largest corporations. With the help of insider and earnings tools from stock research platform Finscreener, traders can get a sense of what’s going on in the executive suites of those companies and what that might mean for their stocks in the coming reporting window.

What It Means For Earnings

Obviously, adjustments to forward guidance is an intuitive way of anticipating a company’s performance around earnings. Taking a look at the Q4 revisions among mega-cap stocks in the S&P 500, a clear pattern emerges to the direction of the revisions as time goes on, particularly once November rolls around. 

The late-2018 market downturn started a trend of negative adjustments. Those from from Exxon Mobil Corporation XOM, which has been laboring under depressed oil prices, and Apple Inc. AAPL, whose iPhone sales problems have been well covered, might not be big news. However, the string of lowered financial outlooks from the Bank of America Corporation BAC JPMorgan Chase & Co. JPM and Wells Fargo & Co. WFC could be a starker reflection of the recessionary fears that have somewhat faded from view in the new year on recent positive economic data.

But with the Fed signaling the possibility of drawing back on the aggressive interest rate strategy it has adopted under Fed chair Powell, the enthusiasm being felt from December’s upbeat economic numbers might be short-lived. Like earnings, economic data are generally considered lagging indicators, and a substandard earnings season, or one that aligns with the lowered estimations of some of these companies, might disrupt the harmony of January’s market.

With that in mind, traders should also keep an eye out for corporate guidance for 2019, which will be getting released and revised a lot over the course of the reporting season.

Taking a look at those already made public, there is still plenty of optimism heading into 2019, at least among the mega-caps.

However, with the exception of Well Fargo and the addition of Visa Inc. V, financial stocks are again showing their anxiety around potentially depressive economic conditions. This could hint at fears of diminished borrowing in the heightened interest rate environment, or even simple anxiety over the Fed’s newfound reluctance to raise rates.

As 2019 get underway, investors should consider factors like whether the banks’ lowered revenue forecasts for 2019 will hold, or whether the economic data will keep the pace pace it set in 2018, or how all of the economic tea leaves fit into corporate strategies being hashed out at the moment. These types of changes not only provide the backdrop for when these companies report their actual revenue numbers, but also clue investors in on the kinds of decisions being made by corporate leaders in the moment and months before.