US Stock Market Bubble: In 1Q 2015, Firms with Bad Earnings Have Been Rewarded More than those with Good Earnings

The US Treasury’s Office of Financial Research appears to be right, US stocks has been plagued by overvaluation and overleverage which has amplified the risks of financial instability.

Here’s more, the reason why overvaluation exists has been because companies with bad or negative performance has been rewarded by the markets more than companies with positive performance.

From Factset’s 1Q Report on the S&P (bold mine)

-For Q1 2015, 85 companies in the S&P 500 have issued negative EPS guidance and 16 companies have issued positive EPS guidance. If 16 is the final number of companies issuing positive EPS guidance for the quarter, it will mark the lowest number since Q1 2006.

-Companies are providing EPS estimates for Q1 that are 9.2% below analyst expectations on average. This percentage is slightly below the 5-year average of -11.3%.

-The market is not punishing companies that have issued negative EPS guidance for Q1 on average. Companies that have issued negative EPS guidance for Q1 have seen an average increase in price of 1.7%, which is well above the 5-year average price change (-0.9%). This is the highest average price increase for companies issuing negative EPS guidance for a quarter since Q2 2009.

-For the current fiscal year, 179 companies have issued negative EPS guidance and 61 companies have issued positive EPS guidance.

The Factset notes on “Highest Average Price Increase for Companies Issuing Negative EPS Guidance Since 2009”

To date, the market is not punishing companies that have issued negative EPS guidance for Q1, while it is rewarding companies that have issued positive EPS guidance for Q1 at only average levels. 

The 85 companies that have issued negative EPS guidance for Q1 2015 have seen an average increase in price of 1.7% from two days before the guidance was issued through two days after the guidance was issued. This percentage is well above the 5-year average price decrease of 0.9% during this same window for companies issuing negative EPS guidance.

In fact, this quarter marks the largest average price increase for companies issuing negative EPS guidance for a quarter since Q2 2009 (+4.3%) Overall, 50 of the 85 companies that have issued negative EPS guidance recorded an increase in price during this time frame. Of these 50 companies, 6 recorded a double-digit price increase.

The 16 companies that have issued positive EPS guidance for Q1 2015 have seen an average increase in price of 2.8% from two days before the guidance was issued through two days after the guidance was issued. This percentage is just slightly above the 5-year average price increase of 2.6% during this same window for companies issuing positive EPS guidance. Overall, 13 of the 16 companies that issued positive EPS guidance during the quarter saw an increase in price during this time frame. None of these companies recorded a double-digit price increase.

Like the Philippines, US stocks has reached a point where valuations or risks hardly matters at all and where price discovery has been almost entirely been broken.