Measuring Earnings Impact in Factors

Since we're in the thick of earnings season, this week we'll be examining the market's responsiveness to earnings by looking at how company exposure to the fundamental factors of Growth and Profitability have changed thus far during the 1Q reporting period. Ultimately, we'll highlight the companies in the Russell 1000 that have seen the most movement in their Growth and Profitability scores in the month of April. We'll also provide an update on how overall risk has been trending in the US and worldwide.

First, let's start with a review of the past week's market and factor action:

‍US Market (4/22/19 - 4/25/19)

This busy earnings week saw generally positive reports (75% of the 229 S&P 500 companies that have reported beat earnings estimates), despite some weakness from large names like Intel, 3M, and Exxon. The S&P 500 hit a record high, and a big headline US GDP print suggested that growth accelerated in the first quarter (driven by high inventories). At the same time, US Commerce Department data showed that consumer and business spending slowed down, and homebuilding investment contracted for the 5th straight quarter.

Here's an update on how some key factors have changed in the US model over the past week, using our normalized return indicator. Going forward, we'll be adding a row for Total US Market Risk (using the Russell 3000 as a proxy).

• Profitability has rallied from -2 standard deviations below the historical mean on 3/19 to 1.09 SD above the mean, and has officially entered Overbought territory. Meanwhile, the rally in Earnings Yield continued.
• Growth continued its gradual recovery from its recent bottom of -1.11 SD below the mean on 4/5.
• Volatility and Market Sensitivity continued to sell off at an incrementally slower pace vs. last week. Both factors are now being flagged as Oversold in our normalized framework.
• Size appears to have peaked at 1.51 SD above the mean on 4/16, and is now sliding back towards Neutral.

Total Risk Update

‍Following up on our last two Factor Spotlights, here's an update on how Total Risk in the US and worldwide is trending, using the Russell 3000 and ACWI indices as our respective proxies.

In the past week, global risk dropped 25 bps, from 12.77% (4/22) to 12.52% (4/25). During that same time, US risk fell 68 bps, from 15.47% to 14.79%. We're seeing risk come down in both markets, and since April 15th there's been a substantially steeper drop in US risk than what we'd seen previously.

‍1Q Earnings - Growth and Profitability

‍In February, we discussed how Growth and Profitability factors typically see the most impact during earnings and periods of early market recovery. This is because these factors are calculated using fundamental data, rather than price information. Thus, movement in these factors can show us the impact of analyst re-ratings, changes in analyst estimates, etc.

Now that we're in the midst of another earning season, let's take a look at how exposure to Growth and Profitability have moved since early April for the constituents of the Russell 1000. Even if a company hasn't reported yet, it can still be rerated due to read-throughs from within its peer group.

As a refresher, the Growth factor includes purely fundamental metrics such as sales growth, estimated sales growth, earnings growth, and estimated earnings growth. The Profitability factor includes return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Methodology: We took a snapshot of Growth and Profitability exposure for the constituents of the Russell 1000 on April 1st and April 25th and then calculated the delta between the two dates, in order to find the companies that have had the highest net relative positive and negative change in exposures to these factors. Let me know if you'd like a .csv with the entire dataset and I'll email it to you.

‍Growth - Top 10 Highest POSITIVE Deltas

Growth - Top 10 Highest NEGATIVE Deltas

Profitability - Top 10 Highest POSITIVE Deltas

Profitability - Top 10 Highest NEGATIVE Deltas

Takeaways

Interestingly enough, some of the biggest movers in the above lists weren't catalyzed by an earnings announcement. Uniti (UNIT), for instance, saw the highest rerating in both Growth and Profitability exposure stemming from positive news about a lawsuit related to its former parent company. MRNA, which was the biggest loser for both factors, hasn't reported yet but experienced a volatile April after IPOing in December.

EBAY, on the other hand, saw a big pop in Growth exposure after beating the street on EPS and revenue on 4/23. Jefferies (JEF) missed on EPS when it reported at the end of March but has seen analyst estimates improve over the past month, resulting in a less negative Growth score. Atlassian (TEAM) disappointed the street on 4/17, and has seen a negative rerating for both factors in kind.

All told, while some of these large deltas were due to company-specific items unrelated to earnings, most of these moves can be ascribed to an earnings announcement or peer announcement.

Something else to keep in mind is that in our February analysis, we determined that:

1. An increase in relative contemporaneous Net Growth & Net Profitability move is likely to lead to an increase in net momentum
2. A decrease in relative contemporaneous net growth & net profitability move is likely to lead to a decrease in net momentum

Next week, we'll take a look at how exposures have changed at the Industry Group (GICS 2) level, to see if we can gain broader insight into the impact that earnings has had on Growth and Profitability metrics.

Regards,
Omer