Companies historically tend to slash guidance ahead of elections, according to a Bank of America Merrill Lynch Global Research report published Monday.
In the note, titled “Election uncertainty may overshadow 3Q earnings,” the bank forecasted third-quarter earnings would average $30.25, below analysts’ expectations.
And while growth should improve heading into the end of the year, as headwinds related to oil and the stronger dollar have tapered, sales trends are weak, and the election may negatively impact results due particularly to uncertainty, wrote the equity and quantitative strategy team at BofAML Global Research, headed by Savita Subramanian.
“Guidance trends this year have paralleled history, where we found that management has typically grown more negative in the months ahead of US elections,” the note read, citing a new “concerning” trend that management has largely pulled back on issuing guidance altogether. While September tends to be a light month for guidance, with 60-70 instances on average, Bank of America Merrill Lynch counts just 16 instances of guidance by S&P 500 companies last month.
This, according to the bank, is a record low for any month in 16 years.
So if management feels uncertain in the future, should investors feel similarly? Perhaps, but perhaps not.
“It’s an excuse of convenience. I think it’s a good example of companies under-promising so they can over-deliver later,” Eddy Elfenbein, editor of the Crossing Wall Street blog, said Monday on CNBC’s “Trading Nation.”
Elfenbein said Wall Street “loves excuses that are particularly external.”
“So if there is a problem, they can say, ‘It’s not our fault, it’s Washington’s fault,’ and if there turns out to be no problem, then they beat expectations and then management can say how wonderful they are,” Elfenbein added.
This is not a cause for worry, according to Elfenbein, who said this is just “how Wall Street works.”
The note highlighted weak overall sales trends and sales “barely” beating analysts’ expectations in the third quarter. Growth expectations may not entirely point to a downtrend, according to one portfolio manager.
“We don’t think that there’s going to be a massive sell-off going into the end of the year because earnings are going to be cut; we believe that the Federal Reserve will continue to raise interest rates in December right after the election, hence maybe there will be more volatility going into Q1 or Q2 of next year,” Chad Morganlander, portfolio manager at Stifel Nicolaus, said Monday on “Trading Nation.”
Uncertainty will prove to be a drag on the overall economy, Morganlander added, and growth will likely remain stagnant.
“But nonetheless, earnings growth is going to continue to be nonexistent in 2017 as well as revenue growth,” he said.