From the desk of Willie Delwiche.
Key Takeaway: Optimism has been unwound, but pessimism remains scarce. We have yet to see a level of fear associated with a complete unwind in sentiment. Still, risks loom overhead with earnings season heating up and the prospect of disappointing news on the horizon. The tailwinds that have accompanied the market for the past 15-months have dissipated. Analysts no longer revise expectations higher, and breadth is weak with more new lows than new highs across the NYSE and Nasdaq combined. Caution could quickly turn into nervousness and fear without a supportive backdrop in the event less than stellar news ushers in price volatility. It’s important to remember that sentiment resets slowly then all at once. We’ve been through the slow part. Now it’s time to see if the market can withstand a potential bout of disappointment.
Earnings season gets plenty of attention – most of it (in my opinion) for the wrong reasons. What a company made last quarter matters a lot less than what its prospects are going forward. Stocks tend to do well when earnings expectations are rising, and not so well when they are falling. Median S&P 500 earnings growth for the year ahead has peaked and is falling and for the first time in over a year, more companies are trying to guide expectations lower rather than higher.