Investors to Wall Street: Earnings Stink!

As the post-election rally continues to lose steam, investors are searching for any reason at all to get bearish.

Luckily, earnings season is upon us!

Now’s the perfect time to overanalyze an endless parade of carefully crafted financial statements and management discussions. The financial media is already droning on about beats and misses and what it all mean for stocks now that the averages have slipped lower four of the last five trading days.

Even though it’s a perfectly ordinary occurrence, the financial news fawns over every earnings report that beats by a couple of pennies. These same people then freak out when a stock that misses estimates gaps down double-digits.

It gets worse. Earnings seasons is only just beginning. Get ready for plenty of mindless earnings stories polluting your computer and television screens over the next couple of weeks.

But we’re less interested in the debating the nuts and bolts of the big earnings reports here at RudeHQ.

In fact, it’s our contention that earnings season is a complete waste of time. For whatever reason, investors seem to think that earnings “beats” matter.

But they don’t. That’s the big problem with how the investing class views the market. They’re fixated on companies that are topping analyst forecasts. Yet most set the bar so low that even the weakest reports tend to beat the magic number. That’s how the game is played.

Of course, the worst part of earnings season is the problems it causes with trading. You could have a nice little uptrend on your hands that hits a brick wall because investors decide they don’t like something about the company’s revenue growth or how the CEO answered a question on the conference call. It’s downright maddening.

That’s why we spend our time analyzing the market’s reaction to earnings. The price action is far more important than the numbers themselves. I don’t care if you hop in a time machine and grab tomorrow’s paper in advance. The earnings headlines can’t tell you how stocks will react.

So what’s the market telling us this week as the earnings reports start piling up?

Sell the news.

The major averages took a hit yesterday thanks to heavy selling from some of the market’s biggest names, mainly Goldman Sachs and Johnson & Johnson.

Both firms failed to impress investors with their first quarter earnings results. And the selling wasn’t just limited to these two earnings losers.

While Johnson & Johnson and Goldman were the big headlines, the selling spilled over to other names as well…

“Goldman pulled down shares of other major U.S. banks and shaved more than 64 points off the Dow,” Business Insider reports. “Although Bank of America reported better-than-expected profit, its shares reversed course to trade slightly lower, falling in line with the broader trend.”

Earnings related selloffs in some household name stocks is set to continue this morning. While IBM beat earnings expectations last night, the tech giant fell short on sales. The miss means IBM has now posted five straight years of declining revenues, according to CNBC.

IBM shares are down more than 5% in premarket trading. So far this week, we’ve seen bad misses like this one spread throughout the respective loser’s sector. Will IBM drag other big tech stocks lower today?

We’ll have to wait and find out. If investors maintain their sell the news outlook, we’re in for a rocky trading week…


Greg Guenthner
for The Daily Reckoning

The Daily Reckoning