Q2 Peak Earnings Season Begins | LERI Reading Worsens
S&P 500 EPS growth for Q2 is set to come in at 4.8%, the lowest level since Q4 2020
Some highly anticipated names reported last week, with big misses from the airlines, Twitter and Snapchat souring investors
The LERI points to more companies showing signs of uncertainty regarding future growth potential
Big tech in focus as peak earnings season kicks off: META, GOOGL, AMZN
Potential surprises this week: ETSY
Peak weeks for Q2 season from July 25 - August 12
Second quarter earnings season continued last week, and better-than-expected results from some big names such as Netflix and Tesla gave investors hope that the economy isn’t all that bad! That enthusiasm faded towards the end of the week when the airlines, Twitter and Snapchat disappointed. Historically speaking, results have been on par with longer term averages, but still showed a downward trend from the massive growth corporations saw in the last year and a half.
The blended EPS growth rate for the S&P 500 did see a slight recovery however, increasing to 4.8%, after falling to 4.2% last week from 4.3% in the week prior. Note that the blended growth rate estimate at the beginning of the season almost always steadily increases as more reports come in. This is because a large majority of companies tend to surpass their expectations, the 5-year average beat rate for the S&P 500 is 77%. The beat rate this quarter is only 68%. The percentage by which companies are surpassing estimates is also much lower than what we’ve seen historically, 2.0% vs. the 5-year average of 8.8%. (Data from FactSet)
LERI Reading Worsens, Consistent with a Corporate America that is Uncertain about Future Growth
We’ve been diligently tracking “corporate body language” for the last 15+ years, that is the non-verbal cues that publicly traded companies send to the market both intentionally and unintentionally. One tell a company can give regarding their financial health is the timing of their earnings release. Academic research shows when a corporation reports earnings later in the quarter than they have historically, it typically signals bad news to come on the conference call, and the reverse is true, an early earnings date suggests good news will be shared. The idea is that you’d prefer to delay bad news, but when you have good news you want to run out and share it.
The LERI (Late Earnings Report Index) encapsulates this sentiment. It looks at the number of outlier earnings date confirmations and whether companies are confirming earnings dates that are later than they have historically reported, or earlier. A LERI reading over 100 indicates more companies are delaying reports, and is meant to be watched carefully. Thus far we see a LERI of 118 for the Q2 season, just lower than the 5-year average of 111, but notably higher than the last 5-quarter average of 77, suggesting the good times corporations enjoyed in the post-COVID bull market are slowly starting to fade. In terms of raw numbers, 41 companies have confirmed earlier Q2 earnings dates, while 52 have confirmed later than normal earnings dates.
Big Tech in Focus this First Peak Week of the Season
Last week big tech names started to make a comeback as investors moved away from defensive names back into cyclicals. That momentum came to a halt after SnapChat and Twitter massively missed the mark Thursday after the close, both reporting results that were below top and bottom-line estimates. As a result the Nasdaq took a dive into the red on Friday, closing nearly 2% lower.
Tech investors are hoping positive surprises from Meta, Alphabet and Amazon will get the sector back on track this week.
Potential Surprises this week:
Company Confirmed Report Date: Wednesday, July 27, AMC
Projected Report Date (based on historical data): Wednesday, August 3
DateBreaks Factor: 3* (highest reading)
Since IPOing in 2015, Etsy has reported Q2 earnings results from August 1 - 6, with the most recent trend being the first Wednesday in August. On July 13 the company confirmed they would report on July 27, one week earlier than we had anticipated, and their first time reporting Q2 results in July, suggesting they have good news to share on the upcoming call.
After a pandemic lockdown pop for Etsy’s YoY EPS and revenue growth which saw both figures increasing by triple digits from Q2 2020 - Q1 2021, fundamentals have come back down to earth. While Etsy benefits from a loyal and active customer base here in the US and the UK, and provides a curated customer experience that shoppers are looking for now, its recent marketing investments to acquire more buyers and keep the existing ones will likely continue to eat into the bottom-line.
This season peak weeks will fall between July 25 - August 12, with August 4 predicted to be the most active day with 1,079 companies anticipated to report. Roughly 59% of companies have confirmed at this point (out of our universe of 10,000 global names). The remaining dates are estimated based on historical reporting data.