The best week to be a stock-picker is here: Morning Brief

Mon, Jan 27, 2020, 4:09 AM

Lots of earnings means lots of stocks on the move

The busiest week of fourth quarter earnings season is about to get underway.

Which means it is a great time to be a stock-picker.

This week, companies collectively representing 35% of the S&P 500’s market cap will report their quarterly results, according to data from Bank of America Global Research. And analysts at Credit Suisse note that Wednesday and Thursday will each see more than 11% of the benchmark index’s market cap reporting results.

Wednesday’s notable reporters will include Microsoft (MSFT), Facebook (FB), AT&T (T), Boeing (BA), and McDonald’s (MCD); big companies reporting Thursday will include Amazon (AMZN), Visa (V), Verizon (VZ), Coca-Cola (KO), and Amgen (AMGN).

And this data leaves out Tesla (TSLA) — perhaps the week’s most highly-anticipated quarterly report — which is set to report results after Wednesday’s close but isn’t a member of the S&P 500, as well as Apple (AAPL), set to report quarterly results after Tuesday’s close.

And with a rush of earnings results comes increased stock volatility.

On Wednesday and Thursday of next week, more than 40 companies in the S&P 500 will report results. Expect volatility. Data from Bank of America Global Research shows that as the number of companies reporting earnings increases, so too does the market’s average performance dispersion. In other words, the more companies that report earnings, the wider the gap is between how an average stock trades relative to the broader market.

The more companies that report earnings, the more volatile the average stock is. (Source: Bank of America Global Research)

Now, to some extent this data just codifies what market observers can see with their own eyes: stocks move more when there is corporate news. And earnings is a guaranteed news event for any company.

An interesting dynamic with respect to expectations has taken hold in this market. One which potentially opens up a larger range of outcomes for post-earnings trading moves.

Bank of America notes that the dispersion in analyst estimates is currently right around its lowest level in almost two decades. In essence, analysts have been reluctant to do much beyond follow corporate guidance and broad Wall Street models.

“Consensus estimate dispersion has been near record lows, which we believe is driven by heightened macro uncertainty causing analysts to be more hesitant and avoid deviating too much from company guidance,” BofA writes in its report.

“For the S&P 500, dispersion currently sits at 6.0%, up slightly from 5.7% last quarter, which was the 18-year low. It is well below the long-term average of 9.5%. If low dispersion reflects a reluctance to diverge from the pack (which we think is likely), focusing on out-of-consensus earnings calls should be rewarded.”