If you’d like to hear more, here’s another 5 minutes.
Now, let’s jump into the details.
Starting with Takeaway #1: Earnings Season Settles into a Groove on the Stats
Last week we noted that after a weak start, reporting season had started to find its footing. Today, we’d take that a step farther and say it’s settled into a groove. Here’s what jumps out so far:
s are similar for the Russell:
• Large Cap stock price reactions to EPS beats have turned positive. We are now seeing mostly outperformance among the stocks that have beaten consensus on EPS so far within the Russell 1000, reversing the underperformance that had been seen among the earliest reporters. Companies beating expectations on EPS are also outperforming within the Russell 2000.
for:
• Old leadership continues to look tired from an earnings sentiment perspective. Our preferred gauge of EPS sentiment, the percent of sell-side EPS estimate revisions to the upside, has been a little bit stronger for Value than Growth recently.
onditions in place throughout:
Moving on to Takeaway #2: Our Rundown on Emerging and Evolving Themes on Earnings Calls So Far
As our regular readers are well aware, our team reads through as many earnings transcripts as we can to get a feel for key themes. Things that jumped out to us in last week’s reading include:
• Perceptions of the outlook, demand and macro backdrop were mixed with a number of companies emphasize better conditions in the 2nd half.
• We didn’t read anything new about the consumer last week, but do note that the tone seemed to skew more negatively than prior weeks and the past few reporting seasons.
• On the cost environment, some noted that inflation and pricing were normalizing.
• On the Fed and interest rates, several companies highlighted the return of uncertainty on this topic and the impacts of high costs of capital and debt.
• Commentary on China and Europe has been much more mixed (far less negative) than what we’ve seen in the past few reporting seasons.
• AI continued to be a key theme, with more of a positive tone than what we observed at the beginning of 1Q24 reporting season.
Wrapping up with Takeaway #3: What Else Jumps Out from Our High Frequency Indicators…specifically on Small Caps and sentiment.
f inflation and the Fed, the R:
o The tailwinds have primarily been attractive positioning and valuations along with improving economic expectations. On the latter point, we’ve highlighted the apparent bottoming in ISM manufacturing and the recent improvement in consensus GDP forecasts, since Small Caps tend to outperform when ISM manufacturing moves up and once GDP starts to trend above average.
o The primary headwind has been the Fed. Historically, Fed cuts have been triggers for Small Cap outperformance, but the shift in leadership has tended to occur after the event not before. Most of the equity investors we spoke with last week, prior to Friday, didn’t think cuts were coming anytime soon, and worried the idea that inflation will moderate from here is based on little more than hope.
o While an argument can be made that the Fed headwind for Small Caps eased a bit on Friday with the worse-than-expected jobs reports, we think it’s equally important to note that the economic tailwinds for Small Caps also appeared to weaken a little. In our meetings, it was apparent to us that some of the consumer companies that reported last week had heightened concerns about the health of the consumer. While still off its lows, ISM manufacturing also slipped in last week’s update. We wouldn’t be underweight Small Caps right now, but are reluctant to turn overweight in light of these complex cross-currents and prefer a neutral stance.
AAII survey, which came into:
That’s all for now. Thanks for listening and be sure to reach out to your RBC representative with any questions.
