(Bloomberg) -- Despite a trade war, all the whiplash stock volatility and the drama in the White House, securities forecasters have almost never been this confident they know exactly what companies will report this earnings season.
Bank of America (NYSE:BAC) charts a measure of Wall Street unanimity it calls analyst clustering, looking at the degree to which profit estimates for individual companies deviate from each other. It was at a record level of tightness headed into the third-quarter season, during which equities lurched, and it hasn’t loosened up much headed into the current reporting season.
That could mean fireworks for companies that do anything unexpected. Take banks, which started the season with a slew of positive surprises. Shares of Bank of America and Goldman Sachs (NYSE:GS) jumped at least 7 percent Wednesday, their best earnings reactions in at least seven years.
Good news for bulls. But anyone who endured the turbulence during the last reporting season knows consensus is a double-edged sword. Misses could be punished, in a big way. In fact, taken together -- both up and down moves -- earnings-day turbulence in individual companies late last year reached the highest since Leuthold Group began tracking the data in 1999.
“Nobody has any incentives to make an outlier call because if you’re wrong, your career is over,” John Goltermann, president at Highgate Securities Investments in Colorado, said by phone. “Surprises will be larger and more frequent, and we’ll probably see more market volatility as a result. It makes people a little more on edge.”
Of course, big moves are easier to take when they’re up. But in a bull market where corporate results have often been an anchor of calm, it’s noticeable when earnings start to create volatility. Particularly right after the S&P 500 plunged to its worst December since the Great Depression and then rallied back to the second-best start of a year in three decades.
Options traders are preparing for turbulence in single stocks. While the relative cost of protecting against swings in the broader market has fallen, for the average stock, it’s rising, according to data compiled by Goldman Sachs. The implied earnings-day move for S&P 500 companies averaged 7.4 percent this reporting season, the highest since the second quarter of 2009.
Why analyst estimates are so clustered is debatable, but one theory links the phenomenon to growing macro gloom that makes forecasting business trends a harder task. The idea is, as things get more uncertain, the tendency toward groupthink increases. From lingering U.S.-China trade tensions to a government shutdown in Washington, Brexit to Federal Reserve monetary policy, things that underpin the global economy are murkier than ever.
BofA’s measure of analyst dispersion hit a 18-year low of 5.2 percent in October and has since risen to 5.6 percent. Still, that’s well below the long term average of 9.6 percent. To strategist Savita Subramanian, the homogenization sets the stage for stock picking.
“If low dispersion reflects a reluctance to diverge from the pack, which we think is likely, our work suggest that focusing on out-of-consensus earnings calls should be rewarded,” she wrote in a note to clients. “Earnings season is a good time to be a stock picker.”
Analysts have been busy cutting their estimates as companies from Apple Inc (NASDAQ:AAPL). to Delta Air Lines Inc (NYSE:DAL). and Macy’s Inc. issued sales or profit warnings. At 12 percent, fourth-quarter profit growth from S&P 500 firms is expected to slow to half the pace from the previous three months, data compiled by Bloomberg show. The deceleration will worsen this year, with profits increasing no more than 4 percent in the first two quarters.
Marko Kolanovic, a strategist at JPMorgan (NYSE:JPM), observed a pattern so far this reporting season, where individual stocks fell in initial reaction post earnings but managed to end the day higher. To him, it’s a sign that share prices may have reflected concerns over a profit slowdown. After the fourth-quarter sell-off that erased $5 trillion from equity values, almost all hedge funds tracked by the firm held exposure to stocks that’s well below the historic average.
“Risks around the upcoming earnings season are balanced,” he wrote in a note. “On one hand, we could see further downside for Q1 guidance, but on the other hand, already reduced expectations and low positioning can result in upside moves.”