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September 15, 2021

A Recovery in Earnings Guidance?

by Tajinder Dhillon.

As 21Q2 earnings season concludes, we move our lens to the next quarter to gauge earnings momentum.  Encouragingly, the S&P 500 21Q3 earnings growth rate forecast has steadily improved over the last three months and currently stands at 29.8%.

In this note, we focus our attention to company behaviour in the form of pre-announcement data, which can help assess whether companies feel bullish or bearish about their own prospects.

Exhibit 1 highlights the latest S&P 500 21Q3 guidance data as of September 10th.  We note 58 instances of positive pre-announcements (i.e., company guided higher than the consensus estimate at the time of announcement).  We also note 40 instances of negative pre-announcements, resulting in a Negative/Positive pre-announcement ratio (N/P) of 0.7.

However, when we compare the 21Q3 pre-announcement data to August 3rd (when we first started to receive 21Q3 guidance data), there is a slight increase in the proportion of negative instances of pre-announcements.

Exhibit 1: S&P 500 21Q3 Pre-Announcements

As shown in the table above, the N/P ratio has increased from 0.5 to 0.7 over this period.  A higher N/P ratio indicates a greater degree of negative pre-announcements issued by companies.

Possible reasons for this change in sentiment include concerns over the delta variant, supply chain pressures, and a higher commodity/freight price environment which has raised inflation rates.

Using a data-driven approach, we can use the Advanced Events Search app within Refinitiv Eikon to count the number of Earnings Conference Call transcripts that include certain key phrases.

Using S&P 500 as our universe, we find that 408 company transcripts published since July 1st mention the phrase “COVID” inside the transcript.  Being more specific, we count 167 company transcripts that mention “delta variant” at least once in the company transcript as shown in Exhibit 2.

The app allows users to click onto the individual company transcript and it will automatically point the user to all instances within the transcript where the keyword is mentioned providing a convenient workflow for Analysts and Portfolio Managers.

Exhibit 2: Advanced Events Search App

Source: Refinitiv Eikon.

Has Earnings Guidance Recovered to Pre-Pandemic Levels?

Another barometer of company sentiment can be measured by the total number of pre-announcements issued by S&P 500 companies.  Looking at the total number provides insight as to whether companies feel comfortable enough to provide guidance which will often be influenced by macro environment conditions.

On average, we typically observe approximately 166 instances of pre-announcements issued by S&P 500 companies (long-term average since 1997).

During the height of the COVID-19, we saw a sharp decline in the number of companies that issued guidance given the unpredictable nature of the pandemic.  Only 65 instances of pre-announcements were issued in 2020 Q2 which is the lowest level in over 20 years and is the 4th lowest total since Refinitiv has tracked this data.

However, this trend has reversed, and we continue to observe a steady increase in the total number of pre-announcements issued as shown in Exhibit 3.  In 2021 Q3, we have seen 104 instances of pre-announcements thus far and is trending to eclipse the prior quarter total of 122 instances.

Encouragingly, it appears that pre-announcements are trending back towards pre-pandemic levels which will be a reassuring signal for investors.

Exhibit 3: S&P 500 Pre-Announcements History

Refinitiv Eikon is a complete solution for research and analytics. It places the most comprehensive market information, news, analytics and trading tools available into a desktop.

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