Result season has begun on a note of disappointment. The reasons are more related to the market’s expectations. In a volatile economic context, the market should usually tone down expectations as business volatility spikes up.
Contrary to that approach, the markets have been very slack in resetting their expectations. Analysts have travelled with the same expectations, set months earlier, coming into the result season. Companies have needed to factor in changes and economic adversities in their business performance that analysts have failed to take due note of. This is the cause of the market’s disappointment with the results of blue-chip companies that have been released so far.
When markets are slack in resetting expectations, valuations tend to remain higher than they ought to be and require a reset whenever there is an economic reset. It is that reset which is happening in blue chip companies after the announcement of Q1 results. We believe that this trend is going to continue through this result season, and sectors, where expectations have been higher, will see derating following a disappointment. Overall, fewer sectors and stocks will outperform expectations given that they have been running high and adverse circumstances have prevailed through the first quarter.
The reaction to the disappointment will lead to an aggressive reset of expectations which will reflect in the valuations of blue-chip companies, especially in the valuations of small and mid-caps where the markets have been persistently over-optimistic. From an investment standpoint, a reset will give the patient investor multiple choices and ample opportunities to deploy capital sensibly.
The coming weeks are going to see the markets continuously lower earnings forecast, mute guidance, and derate companies. The economic volatility will persist for a while, and the market will see nervous days during this phase. Investors must turn this phase into an opportunity to buy blue chips at favourable valuations, bet on select contrarian ideas, and always create additional capital to take advantage of opportunities when they open up.
