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Reaction to LEVI's Earnings Might Be A Signal For This Earnings Season

Reaction to LEVI’s Earnings Might Be A Signal For This Earnings Season

Earnings season for the third quarter of 2019 is just beginning, with a couple of early reports over the last few days. The big names start later this week, with Delta Airlines (DAL) on Thursday, then Citigroup (C) on Friday, then the rush begins next week. Usually, the early results don’t really tell investors anything about what an earnings season will do to the overall market, as it is the average of a large number of releases that drive the indices, but this quarter is different.

What matters now is perception, not the reality of the numbers.

Stocks are still very close to all-time highs, with the market focused on trade news and the possibility of further rate cuts from the Fed. The extent of the influence of those things is clearly visible in the price action over the last couple of days. On Tuesday, the market opened lower on news that the Trump administration was adding some Chinese companies to a blacklist, then jumped when Fed Chair Powell said in a speech that the central bank would start expending their balance sheet again, effectively launching a mini round of QE, then fell again as trade came back to the fore.

This morning’s action has been even more indicative of the mood. A report from a news agency that an anonymous Chinese official had said off the record that China would consider a partial trade deal despite the sanctions on some companies caused the Dow to jump around 200 points. Think about that for a minute: Just a report that a “partial” deal would be “considered” was enough to cause a big move.

Obviously, the default position for traders is optimism on trade and on the Fed’s actions. The ebb and flow of news is causing some volatility, but that suggests that, absent any bad news, we can move higher. However, from an earnings perspective, whether news is good or bad is all about where traders choose to focus. The reaction to the earnings from Levi Strauss (LEVI) yesterday demonstrate that.

LEVI 5 day chart

At first glance, LEVI had a good quarter. Adjusted EPS came in at $0.31, about ten percent above Street estimates, and revenues were also slightly better than expected. Those are decent, if not spectacular results and caused the initial pop in the stock up to $19.89 in after-market trading yesterday. Once that reaction to the headlines was over though, the mood changed, and the stock plummeted to below $17.50.

If that were part of a generalized move down on some trade news, it would make sense given Levi’s exposure to China, but it came as the market was jumping on the report mentioned earlier. That means that the drop was more about a rethink of the numbers than anything, and that isn’t good news.

This earnings season, like every earnings season, will no doubt contain a good number of beats of expectations. On average, over two thirds of companies beat estimates every quarter. That is more to do with the way those estimates are arrived at than anything, but it is still typically supportive for stocks. If traders and investors simply focus on those beats this quarter, that will be the case again. This morning’s move in LEVI indicates, however, that they may look beyond the results relative to estimates and see them in the context of the past.

On that basis, Levi’s beat was not so impressive. It represents a 4% decline in profit from a year ago.

Obviously, this is just one example, but it does have worrying implications. Every bit of news is nuanced, and that is particularly true of earnings reports. What matters for a stock’s trajectory is where traders focus. Do they look at the beat, or the year-on-year decline? In this case it seems to be the latter, and if that persists, earnings season, which normally gives the market a boost, could do the exact opposite over the next few weeks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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