The second-quarter earnings season is fast approaching, and chief executives are expressing their lowest level of confidence in the future since the start of the COVID-19 pandemic, based on the Late Earnings Report Index (LERI).
Developed by market data company Wall Street Horizon, the LERI is currently at its highest level since the first quarter of 2020 when the initial lockdowns were implemented.
The LERI and Its Significance
The LERI measures the occurrence of outlier earnings date changes in companies with a market capitalization of at least $250 million. With a baseline of 100, anything above this value indicates greater uncertainty about the future, while a reading below suggests increased visibility.
According to Wall Street Horizon CEO, Barry L. Star, “The LERI is derived from many years of tracking Corporate Body Language, or the non-verbal cues that publicly traded companies send to the market both intentionally and unintentionally that impact volatility.”
Research in the field has established that when companies postpone their earnings release date to later in the quarter than usual, it often signifies upcoming negative news. Executives may be attempting to delay the inevitable disappointment. Conversely, if a company advances the release date to earlier in the quarter, it generally indicates positive news that they are eager to share promptly.
Currently, the LERI reading stands at 155.
Calculation and Outlook
As Wall Street Horizon’s Vice President of Research, Christine Short points out, the LERI for this quarter will not be calculated until the big banks report on Friday.
As of July 10, there were 31 late outliers and 18 early outliers identified.
Earnings Season Outlook: CEOs Pessimistic as Recession Fears Linger
Recently published data points and forecasts indicate that CEOs are growing increasingly pessimistic about the state of the economy. As earnings season continues, the number of late outliers is expected to rise, signaling worsening conditions for corporations in the second half of the year.
The Measure of CEO Confidence from the Conference Board further supports this sentiment, falling to 42 in the second quarter from 43 in the first. A reading below 50 suggests that CEOs are largely pessimistic about what lies ahead for the economy.
On Friday, JP Morgan Chase & Co. Inc. (JPM), Citigroup Inc. (C), and Wells Fargo & Co. (WFC) will kick off the second quarter with their earnings reports.
Investors will be closely watching to see if companies and their leaders mirror the downbeat outlook of economists, who are predicting a potential recession. Some argue that the economy is already in a recession.
During first-quarter earnings calls, executives expressed optimism for improved business conditions in the second half. They attributed this optimism to higher interest rates taming inflation and lower input costs.
Forecasts currently support this positive view. According to FactSet data, S&P 500 companies are projected to experience a 7.2% decline in per-share earnings for the second quarter, followed by a 0.3% rise in the third quarter, and a significant gain of 7.8% for the fourth quarter.
Year to date, the S&P 500 (SPX) has gained 15%.
It remains to be seen whether companies can continue to maintain high margins during this earnings season or if they will resort to layoffs in order to do so.