State Street is sparking a rally this morning after reporting better than expected Q2 earnings. The news sent financials rallying over 2% with State Street itself up over 10%. It’s certainly some welcome news for a market that can’t seem to grasp a single shred of positivity of late. But the question for investors is whether this is the beginning of a trend or simply an anomaly?
The good thing about the banks is that they don’t provide quarterly guidance when they report earnings. The bad thing about the banks is that most of them have had dismal quarters as capital markets in general have been atrocious in the most recent quarter. Fortunately, estimates for the financials have declined dramatically in the last quarter. For instance, just 2 months ago Goldman Sachs was slated to earn $4.70 in Q2. Today’s estimate? $2.40. So, their estimate has been cut almost 50% in just 60 days. That’s creating a low hurdle for many of the banks. And as I mentioned above, the best part is that they don’t provide guidance.
Why is that so important? Because the last few months have been characterized by uncertainty. Thus far, we’ve seen one distinct trend in early earnings reports – tepid guidance (FedEx and Bed Bath & Beyond come to mind). If you’re running a company in this environment the last thing you’re doing is raising your guidance. At best, you’re hitting targets and hoping that the market is satisfied with the rear view Q2 figures (which, on the whole, should be another quarter of “beats”.) The last thing you want to do is raise guidance into a potential economic dip and get caught in a downturn with disastrously high expectations. So, we can expect the tepid guidance story to continue.
The moral of this story? This could be a sector specific theme we’re seeing here today. While banks are likely to report “better than expected” results (due to dramatic estimate cuts) they are unlikely to do what the rest of the market has been doing (cutting guidance or providing tepid guidance – because they don’t provide guidance to begin with). That could be a bullish near-term theme for the banks. As for the rest of the market – no such luck. Expect a solid quarter of “beats”, but no “raises” to go along with it.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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