EXPECTATION RATIO CONTINUES TO POINT TO GOOD EARNINGS
As we detailed a few weeks ago, this earnings season is shaping up to be another positive one. Alcoa officially kicks off the season after the bell this afternoon. Equities have rallied almost 16% in the last two months largely in anticipation of continuing strong corporate profits. This outlook is confirmed by our Expectation Ratio which has moderated substantially in recent months, but continues to point to an environment where expectations are becoming more in-line with actual corporate profits.
As we’ve previously mentioned, this is likely to be the final quarter where earnings are dramatically better across the board (the 70%+ beat rate is not here to stay). I would expect the downward trend in the ER to continue in the back half of the year and make for much more difficult comps. Nonetheless, for now, the ER continues to give the all clear on the earnings front. Whether the market has priced this in already or has further to run is anyone’s guess, but the action looks very similar to the last few earnings seasons where investors were eager to front-run earnings and sell the good news.
