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DAVID BIANCO: A Popular Stock Market Warning Sign Is 'Crying Wolf' Again

Oct 7, 2013, 21:39 IST

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The ratio of companies providing negative earnings guidance to companies providing positive guidance has been on the rise.

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This suggests that the market is a bit too optimistic about corporate earnings. And a disappointing quarter of earnings announcements could be bad news for stocks.

However, Deutsche Bank chief U.S. equity strategist David Bianco says guidance ratios are crying wolf again.

In his latest note, Bianco tells clients that "investors should ignore these aggregated stats."

Bianco writes:

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Of the 109 companies to provide quarterly guidance, over 80% was negative for 3Q. This is the worst guidance ratio since 2006, just as 4 of the last 5 quarters each climbed to set a new worst. Other than during the recession, usually a super-majority of companies issue negative pre-reporting guidance.

We have repeatedly argued that guidance ratios are noisy and unreliable. Only 20% of companies provide quarterly guidance, the mix changes from period to period, the ratio is not earnings weighted and does not differentiate between a 1% or 10% change in guidance.

Bottom-up EPS growth and estimate revision trends are more insightful. Btm-up 3Q S&P EPS declined only 3.2% among the least in two years and est. EPS growth just prior to reporting is the highest in over a year at 4.1%. Our $28 3QE EPS implies the usual 3-4% weighted average beat.

Bianco has a 1,750 year-end target for the S&P 500.

Third quarter earnings reporting season really gets underway Tuesday after the closing bell with the announcement of Q3 results from Alcoa and Yum! Brands.

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