Chart of the Day: Ratio of Negative to Positive Earnings Guidance stands at a record high; At 3.5 negative updates for every positive one, that is by far the highest ratio since FactSet began tracking such data in 2006.

Updated April 1, 2013, 9:06 p.m. ET

Investors Ignore Negativity at Their Peril


Recent months have offered yet more proof that markets love to climb a wall of worry. Hand-wringing, whether from retail investors or professional pundits, often precedes heady gains. But some people’s anxiety counts for more than others. While last week the S&P 500 finally erased all its bear-market losses and strategists are falling over one another to raise their year-end targets, the only people in the market with legal inside information are surprisingly cautious. As the first quarter drew to a close, 86 companies in the S&P 500 issued negative guidance for what they expect to report in earnings for that period. Just 24 issued positive guidance. At 3.58 negative updates for every positive one, that is by far the highest ratio since FactSet began tracking such data in 2006.


Of course, most companies, including many of the largest, don’t tell analysts what to expect directly. But a look at consensus earnings-per-share expectations for the companies with the 10 highest weightings in the S&P 500—making up close to a fifth of the total—shows a similar pattern. Relative to where forecasts stood at the start of the year, they have fallen for seven and risen for three.

Apple had the largest drop, with estimates down 17%. Of those companies actively lowering guidance, materials companies such as Peabody Energy BTU -1.05% were overrepresented.

Ignore corporate worrywarts at your peril. In the last bull market, the negative corporate guidance ratio hit a peak of 2.38 in the third quarter of 2007—just as that bull market was ending. Meanwhile, one of the lowest ratios of negative guidance, 0.97, came during the second quarter of 2009, when many analysts and investors still were very pessimistic and stocks hit a 13-year low.

Investors’ reaction to recent guidance shows they may be too sanguine. FactSet notes that the average stock-price change from two days before to two days after the announcement of negative guidance has been a drop of just 0.3% this quarter. About half of the stocks involved actually rose.

Conversely, companies issuing positive guidance had larger-than-typical gains on average, although this figure was pulled higher by Netflix, which rallied by two-thirds.

Watch out. There may be a nasty drop on the other side of this wall.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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