With Earnings Season Behind Us, Here’s What Our Ratings Model is Seeing ...

The second-quarter earnings season is largely behind us, and by the yardsticks of sales and earnings, things looked pretty good. More than 98% of S&P 500 companies have already reported, and among those companies, Bloomberg says top-line sales grew 5.3% while bottom-line earnings rose 9.4%.

Not bad. So how come the average stock in the S&P is down 1.5% in the past month? Then there is my preferred indicator, which measures market breadth by looking at the percentage of stocks trading above their 200-day moving averages. It’s down to troublesome levels as you can see here, something that is prompting me to be more cautious in the short term.

But is there something truly fundamental going on from a longer-term perspective? Are there hidden red flags behind those headline earnings numbers that we need to be worried about? I went to our Weiss Ratings data to find out!

When companies report fresh financial data, the model incorporates those figures into its analysis. It crunches numbers on an absolute and relative basis from the financial statements, as well as volatility and return metrics.

Since the end of the second quarter, our ratings model has downgraded only 46 stocks in the S&P 500 by more than one letter grade. Conversely, it has upgraded 55. It kept ratings on the other 387 stocks the same (the figures don’t add up to 500 because a small handful of stocks aren’t rated).

So far, that’s telling us that there aren’t really any major red flags in the data. While the markets are near all-time highs, fundamentals justify the move. If we were seeing a disproportionate number of downgrades, then I would argue otherwise. By the way, I also extended my analysis to a broader universe of stocks outside the S&P 500. The readings and results were similar.

Bottom line: So far, there isn’t anything fundamentally worrisome going on. Overall, companies are healthy and growing … and this recent market correction is stemming from sentiment and confidence concerns, rather than anything concrete.

Best,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.