The New Narrative For Earnings: Blame Brexit

Every quarter there is always a fallback narrative put forth as to why companies fail to meet earnings expectations, and we now have that narrative for the rest of 2016 (and perhaps through 2025): Brexit.

As we discussed yesterday, as we enter into Q2 earnings season the main focus on all earnings calls will be to what extent Brexit will impact business for the rest of the year. Will firms guide down materially due to the UK referendum, or will guidance largely not be impacted, this is going to be the main focus of analysts and investors. To wit:

the main focus (by far) will be on the CQ2 earnings season (the first few reports will hit during the week of 7/11 but the heaviest volume will be during the week of 7/18 and 7/25). The CQ2 earnings season will be particularly important as investors are eager to hear updates from CEOs/CFOs on the extent to which Brexit-related disruptions materially impacted the outlook for their businesses. If the tone on the Jul/Aug conf. calls sounds relatively similar to the Apr/May updates (i.e. Brexit is acknowledged but doesn’t dramatically change H2 guidance) that would go a long way towards alleviating investor concern. Prior to the 6/23 referendum investors were penciling in a ~$130 SPX figure for ’17 – if that number only has a couple of dollars of downside stocks will continue stabilizing.

Almost right on cue, here is Reuters today planting the seed that Brexit can now be used as an excuse for firms that need to lower guidance without any pushback.

From Reuters

Foreign exchange volatility and economic uncertainty after Britain's vote to leave the European Union have imperiled a projected profit rebound in the United States, where companies have been stuck in an earnings recession since last year.


U.S. companies doing business abroad are at particular risk because of a jump in the dollar since last week's referendum and expectations of a potential stumble in European economies.


A strong dollar and plummeting oil prices slammed U.S. corporate earnings starting in 2015, but the stabilization of crude prices and the dollar in recent months has led investors to bet on a return to modest growth starting in the third quarter.


As the second-quarter reports gets underway in the coming weeks, executives' comments about the so-called Brexit's potential effects could alter Wall Street's expectations of when the profit slump will end.


"This adds more fuel to the fire, that the so-called spurt in growth in the second-half of the year is going to be really tough to achieve," said Synovus Trust Company Senior Portfolio Manager Daniel Morgan, who believes analysts are too optimistic.

To add to the narrative, Reuters notes that some companies such as Carnival are already warning on the impact Brexit will have on full-year earnings targets.

Some U.S. companies are already voicing caution about Brexit.


Cruise ship operator Carnival Corp (CCL.N) warned in its quarterly report on Tuesday that Britain's withdrawal from the European Union could affect global consumer confidence.


Chief Financial Officer David Bernstein estimated on a conference call that weakness in the pound and euro would have an eight-cent impact on Carnival's full-year earnings per share, although he said higher customer demand would make up for that and he did not reduce his outlook.

While it is true that there may be some impact on earnings related to Brexit, shifting the narrative solely to Brexit in order to mask the fact that the global economy is already stunningly weak is a sad, yet predictable tactic.

And as a reminder, 2016 outlooks have been tweaked to the downside long before the UK referendum.

As we said, none of this really matters as any and all misses that do take place will conveniently be blamed on Brexit as a "one-off" event, and P/E multiples which are already in their 99th percentile will continue to all time highs.