Earnings Sweet Spot Has Begun to Sour

In recent years, we have cited an earnings season pattern for stocks in which the S&P 500 has tended to perform better during periods when companies are reporting quarterly earnings than during periods when they are not. We have referred to this phenomenon as the earnings sweet spot.

We have measured this period two ways: one way includes the two-week period before Alcoa unofficially kicks off earnings season (so-called pre-announcement season) and one that does not. The logic was that company results get priced in ahead of time, so stocks experience an earnings-driven gain before actual results are reported. At the other end, for several years, we found that stocks had produced consistent gains during the four-week period beginning with Alcoa when the bulk of S&P 500 companies reported their results. In fact, at one point in 2014, we could reasonably claim that the entire bull market advance occurred during earnings season. Pretty amazing.

But as shown in the figures below, this stock market pattern has not worked as well recently, especially during pre-announcement season. Putting numbers on it, during the 2010-13 period, the S&P 500 rose during 81% of pre-announcement periods, with an average 1.1% gain; in 2014-15, this dropped down to just 25% of the periods, with an average loss of 1.4%.

The pattern has similarly weakened using the full six-week earnings season (the two-week pre-announcement period and four-week reporting period starting with Alcoa). The average gain for this time frame in 2010-13 was 2.9%, with gains 69% of the time, compared to an average 0.5% loss and 38% batting average we saw in 2014-15.

Most recently, during the fourth quarter of 2015 earnings season, the S&P 500 fell over 10% during that six-week period. Recall that this lined up with one of the worst starts to a year for stocks and encapsulated much of the 15% drawdown the S&P 500 experienced between the 2015 highs back in May and the February 2016 lows. The macroeconomic concerns (China, Federal Reserve, oil prices, strong U.S. dollar) clearly outweighed any potential positive reaction to earnings news.

We would also point out that the earnings news during recent quarters has not been as good. These macro drags were a big part of that, especially oil and the dollar. The upside surprise to consensus earnings estimates in the fourth quarter of 2015 was 1.2%, the worst in more than three years (according to FactSet data).

Investors probably should not count on the earnings sweet spot to give stocks much of a lift over the next month or so, but we are hopeful that this earnings season could represent an inflection point and that better news on the bottom line may lie ahead (read our preview here).

S&P 500 Returns During Two-Week Earnings Pre-Announcement Period

Source: LPL Research, FactSet 4/8/16
Data reflect two weeks before Alcoa reports quarterly results.

S&P 500 Returns During Six-Week Earnings Period Including Pre-Announcements

Source: LPL Research, FactSet 4/8/16
Data reflect two weeks before Alcoa reports quarterly results plus the four weeks after.

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Stock investing involves risk including loss of principal.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial LLC.

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