What do institutional investors and sell-side analysts expect to hear when listening to first-quarter earnings calls in the next few weeks? Tales of “positive, albeit slowing” performance, according to Corbin Advisors’ Investor Sentiment Survey.
About half of the institutional investors and sell-side analysts surveyed expect earnings to decrease sequentially, an increase from 41% the previous quarter. In September 2018, only 17% predicted a decline in earnings growth.
Key performance metrics are expected to remain flat or decelerate. In particular, organic growth, earnings per share, and profit margins are expected to either be flat or worsen. Investors and analysts were last this pessimistic in December 2015.
“After the nonstop rally in the first quarter of 2019 erased December’s selloff, investors are bracing for what our survey of global investors and analysts expect will be the first in a sequence of contracting corporate earnings announcements,” said Rebecca Corbin, Founder and CEO of the investor relations advisory firm.
Amid slowing growth, “margin preservation will be the watchword” for Q1 earnings season, Corbin suggested.
Given the disappointing headline numbers, Corbin said that it’s “critical” that CFOs and CEOs add context by addressing capital deployment strategies, including deleveraging, and providing clear direction on outlooks for the second half of 2019. “As we move into a new market phase, the stakes are higher and competition for investor capital will be fiercer,” she said.
Seven in ten (70%) of investors surveyed say they will place more emphasis on reporting companies’ balance sheet strength versus a year ago. The ideal net debt-to-EBITDA target for nearly all sectors (excluding REITs) is 2.0x, down from 2.5x in 2016, found the survey.
Fortunately, market softening is priced into expectations, Corbin believes.
Corbin thinks the investing environment will be more level-headed this earnings season, with the market “looking at broad trends at industry level rather than company-specific moves.”
Bearish sentiment among survey respondents, which climbed to 49% in Q4 2018, dropped to 33% in the first quarter.
And despite 2019’s strong start in the stock market, the survey found that investors generally believe U.S. equities are “fairly valued.”
Almost seven in 10 (69%) investors report they will be holding investments or rotating them (moving money from one sector to another) quarter-on-quarter, an increase from 59% in the fourth quarter of 2018. Only 14% expect to be net sellers, down from 25% in December 2018.
“After the freefall that characterized investor sentiment during [the fourth quarter] earnings season, analysts and investors have landed on slightly firmer ground,” according to the advisory firm.
As to the macroeconomic environment, the investors and analysts expressing “continued” or “more concern” with a possible recession fell to 43% from 59% in the fourth quarter; still, many expect economic growth to slow, with 82% anticipating 2019 U.S. GDP of 2.5% or less, an increase from 77% the previous quarter.
Rising interest rates, which were identified as the number two concern in the fourth quarter of 2018, are no longer a worry for nearly 80% of surveyed respondents. More than half (54% ) say they do not believe the Federal Reserve’s Open Market Committee will hike rates in 2019.
Amid the controversy over share buybacks, 42% of institutional investors and sell-side analysts say buybacks are still either the first or second preferred use of capital for a given company. More than half (54%) say M&A is the first or second preferred use, and 39% say reinvestment is.
The survey was conducted March 13 to April 3, 2019, and is based on responses from 76 institutional investors and sell-side analysts globally, representing more than $768 billion in assets under management.