- Positive, negative surprises see little difference in shares
- Oil prices, S&P 500 moving in locksteps by most since 2011
An earnings season billed as make-or-break for the stock market has been almost completely drowned out by lockstep moves steamrolling everything from equities to oil.
Companies started disclosing results two weeks ago and so far it hasn’t mattered if they beat or missed analyst estimates: reactions in share prices have been the smallest in 14 years, according to data compiled by Bank of America Corp. It’s an example of how little has been able to pierce the market’s day-to-day fixation with oil and China’s economy, obsessions that have sent daily swings in benchmark indexes almost doubling from 2015.
Investors were expecting more from an earnings season that may still mark the first three-quarter decline in Standard & Poor’s 500 Index profits since the financial crisis. Instead of taking cues from corporate results, the benchmark gauge for American equity has ended up moving in virtual lockstep with oil, with their relationship reaching the tightest since 2011.
“We’re not just asking, was this a good quarter for this company?” said Kim Forrest, an analyst at Fort Pitt Capital Group Inc., which oversees about $1.7 billion in Pittsburgh. “In the back of everyone’s mind, the question is, is the world hurtling itself into a recession? Oil has been in the past a great proxy for that when it demonstrated demand out there.”
The muted reaction to earnings is a departure from last year, when a successful trading strategy was simply to buy U.S. stocks just before earnings season. Back then, better-than-expected results helped reassure investors that U.S. profits were holding up outside energy. As oil continued its plunge into 2016 and China devalued its currency, pessimism is building that the earnings deceleration since mid 2015 may not end soon.
While the S&P 500 has lost 6.9 percent in January and is headed for its worst monthly performance since 2011, earnings have exceeded analyst estimates by a combined 4.1 percent, data compiled by Bloomberg show.
Among firms that have beaten forecasts, stocks have risen an average 0.4 percent more than the market on the first day following their financial announcements, compared with 0.5 percent underperformance for those that trailed, according to data compiled by Bank of America through Jan. 22. The gap is the smallest since the fourth quarter of 2001.
“With a broad selloff in January, earnings took a back seat,” Savita Subramanian, chief equity strategist at Bank of America in New York, wrote in a note to clients Monday. “Alpha opportunity has likely been hampered by the tick-up in intra-stock correlations this earnings season amid the market volatility and macro concerns.”
Volatility and correlation are shooting up in stocks as global growth forecasts and interest rates exert a bigger influence. The S&P 500 has moved 1.3 percent a day this year, compared with an average daily fluctuation of 0.6 percent in the last three years. The Chicago Board Options Exchange’s S&P 500 Implied Correlation Index, which uses options to measure expectations about whether the U.S. equities will move in unison, reached a three-month high last week.
Oil and stocks have also shown an increased tendency to rise and fall in tandem. In the past 90 days, the S&P 500 has moved in the same direction as oil 69 percent of the time, compared with an average 55 percent since 2000, data compiled by Bloomberg show.
At the same time, the 30-day relationship known as a correlation co-efficient reached 0.97 on Jan. 21, a level that’s been surpassed only one other time since 2000, in August 2011. A reading of 1.0 indicates the assets are moving in the same direction by the same amount. The relationship is not as strong when longer periods are considered.
The stock market’s fixation on oil prices is “unhealthy” and “somewhat misguided,” according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist. Energy companies’ contribution to S&P 500 earnings has shrunk to less than 5 percent from 15 percent a few years ago and concern that oil-based sovereign wealth funds may be forced to sell other financial assets like stocks to meet local government budget needs is “overdone,” he wrote in a note to clients Friday.
“There is a misperception that the oil story is foreshadowing an economic recession - that’s not the case - and that’s why the correlation with stocks has been rising,” David Lafferty, the Boston-based chief market strategist for Natixis Global Asset Management, said in an interview. His firm manages $966 billion. “If it were demand driving oil prices, that would make sense, but it’s been supply pulling away from demand. And if that’s the issue, then they should not be as correlated with oil.”
Still, fear over oil’s collapse and its ramification for global growth are reigning in a market where individual company fundamentals are overlooked. Most companies in the S&P 500 haven’t seen share prices fluctuate to the degree anticipated by options investors following their earnings reports, according to data compiled by BMO Capital Markets Corp. As of Thursday afternoon, 82 percent of 73 companies in the benchmark gauge moved less than was implied by options positioning, the data show. That exceeds the eight-quarter average of 63 percent.
As a stock picker, “you try to squash this fear as much as you can,” Fort Pitt’s Forrest said. “It’s not a good feeling because you see everyone else is trading and you’re like, ‘am I dumb?”’