Earnings In Focus: A Necessary Revision

So here we are. One more earnings season in the history of the United States. Now the obvious question is: should we open the champagne? Well, so it seems… Let’s take a look:

Financials were first on the list to report earnings this season, with JP Morgan Chase, Bank of America, Wells Fargo and Citigroup all showing better-than-expected results.

While these four failed to impress investors, they results were undeniably solid. JP Morgan, Bank of America and Citigroup operations were supported in the first quarter by recent interest rate hikes by the Federal Open Market Committee.

Higher interest rates allow banking institutions to charge more for loans (yes, better start paying that credit card soon). However, that might not be good for mortgages, which counteracts the effect in the long run. Wells Fargo couldn’t benefit from higher rates as Fed authorities prohibited the investment bank to take advantage of them until pending issues are solved.

These four institutions headed south following figures as most investors had weighed in good results in advance, turning this event into a classic “buy the rumor, sell the fact”.

The Cboe Volatility Index is now seen as one of the best gauges for fear in markets and it has been moving close to record lows in the last three weeks.

That kind of reaction outlines two things:

1. Market players trust that supportive news are getting closer

2. Markets are losing sensibility to risk factors

Don’t believe me? Take a look around. US-China trade war, air strike in Syria, constitutional crisis in the United States, massive data bridges by heavyweight names such as Facebook.

Relevant quotes in this situation:

Binky Chadha, chief global strategist at Deutsche Bank: "Everybody that I know expects earnings to be very, very strong and very, very good.”

Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors: “It’s normal and expected for implied volatility to come in ahead of earnings because earnings usually do have a dampening effect on realized volatility"

Peter Boockvar, chief investment strategist at Bleakley Financial Group: “Even if you deliver good earnings, it doesn't mean the market will reward you"

FortFS