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Focus On Q1 Earnings Season

The major indexes are on track for a modestly positive open on the back of oil market gains, but the focus is shifting to the Q1 earnings season, which ramps up in the coming days.
 
Many in the market see the sharp drop in Q1 EPS estimates over the last three months as providing companies with easy paths towards positive earnings surprises. That’s a plausible argument, and the ratio of earnings surprises this earnings cycle could very well surpass what we have been seeing in other recent periods.
 
The question is whether positive earnings and revenue surprises will be enough to push stocks higher. I doubt it. More than positive earnings and revenue surprises, market participants will be looking to management’s guidance for the current and coming quarters. We see this in play in the market’s reaction this morning’s report from Fastenal (FAST) and Monday evening’s Alcoa (AA) release. Both of these reports were OK relative to Q1 estimates, but they fail to inspire confidence about the current period.
 
Management’s guidance will determine how estimates for the current period evolve over the coming days as companies report Q1 results. Current estimates put S&P 500 earnings growth in 2016 Q2 at a decline of -5.5% on -3.3% lower revenues, which will be the 5th quarter in a row of negative earnings growth for the index.
 
We know that these estimates will come down in the coming days. But the question is whether they will go down as much as Q1 estimates did over the last three months, or we will see an improvement on the revisions front? The answer to that question will determine how stocks perform over the next four weeks.

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