Could This Be a Brutal Earnings Season? If So, How Should One Be Positioned?
Yesterday BASF, the largest chemical company in the world, announced its earnings would fall well short of analyst estimates in the second quarter. Earnings season in the US begins in a few weeks. So, we ran through our charts to harvest any insights about how corporate earnings may play out.
I’m afraid the results are not what most investors want to hear: 2Q earnings season could be pretty ugly. First, I look at the percent of S&P 500 companies reporting positive sales surprises against the JP Morgan Global Manufacturing PMI. Given the deteriorations in the JP Morgan PMI—which is now below 50—we expect to see a dwindling percent of companies beating on the top line.
Historically the percent of companies reporting a positive sales surprise is correlated to credit spreads, in particular BAA spreads. In this next chart, I overlay the percent of S&P 500 companies reporting positive sales surprises against BAA spreads. This suggests credits spreads could potentially continue widening, making corporate bonds maybe not the ideal alternative to stocks in a stormy earning season, in our opinion.