Published April 20, 2012
Earnings and earnings expectations have and always will drive stock price higher or lower. Analysts at all research firms make earnings forecasts based on many factors and these reports are often the reason stocks are valued where they are prior to announcing their results.
For the most part the analysts do an excellent job, especially based on the limited visibility they have into a company’s inner workings. April is the month when first-quarter earnings are released. I feel this is a crucial announcing season -- even more so than other quarters of the year because companies often give us guidance for the rest of the year and how they think the rest of the year will fair.
Surprisingly, with 22% of the S&P 500 companies reporting, aggregate earnings are tracking 6% ahead of the consensus opinions. This is good, but a deeper look reveals that the majority of this comes from one sector, financials. The remaining companies, excluding financials, have accounted for less than 40% of the upside.
Although consensus earnings forecasts are ticking higher, be careful. Analysts are overly optimistic this time of year in forecasting full-year estimates. With possible negative headwinds from around the world on the horizon that represent a possible drag on future earnings, I would slowly reduce your exposure to equities.
Be cautious right now. The risk return ratio isn't in your favor.