“If anything deserves to be called the secret of the universe, calculus is it.”
-Steven Strogatz 

Oh we ROC (rate of change) folks love quotes like that. Legendary Quantum Physicist, Richard Feynman, called calculus the language that “God talks.” On that score, Albert Einstein marveled that “the eternal mystery of the world is its comprehensibility.” 

If you’re into the whole polymath thing and how you can apply it to your evolution as an investor, the aforementioned quotes come from a math book I’ve been reading this summer called Infinite Powers, by Cornell Math man, Steven Strogatz. 

“Isaac Newton was the first to glimpse this secret of the universe. He found that the orbits of the planets, the rhythm of the tides, and the trajectories of cannonballs, could all be described, explained, and predicted by a small set of differential equations.” (pg 3)

Earnings Season Calculus - z 03.19.2019 did do the math cartoon

Back to the Global Macro Grind… 

On short-term market moves, PM emotions, and FOMO, I’m sure even Newton would struggle in explaining the trajectory of centrally planned market #cowbell. That said, I think both he and Einstein would be totally into our 4 Quadrant GIP Model vs. some Old Wall Strategist dude’s thoughts on “market valuation.” 

Bottom Line (from a Macro perspective): you wouldn’t be risk managing Fed, ECB, PBOC, etc. #cowbell if the ROC of both GROWTH and INFLATION were NOT #slowing right now. Your core Asset Allocations and Sector/Factor Exposures to Treasuries, Gold, Utes, etc. wouldn’t be crushing it for the last 10 months either. 

From an Earning Season perspective, this is precisely the spot on The Cycle’s sine curve where it gets a lot tougher than getting the Global Macro part right has been. This is where the dudes and dudettes who can get both the macro and their stock picks right start to absolutely crush their competition. 

*See our DIS long vs. NFLX short call with a long “quality” vs. short “leverage” factor overlay for details 

“So”… as they like to use as a preface on the Old Wall… let’s get into some Earnings Season Calculus: 


  1. So far, 82 of the SP500’s companies have reported aggregate year-over-year (y/y) EPS growth of +1.89%
  2. FINANCIALS have led the “better than expected” narrative with 27 companies reporting +3.3% y/y growth
  3. REITS have the #1 y/y growth rate with 3 companies reporting aggregate y/y growth of +17.2% 

B) The BAD

  1. 6 of the 11 SECTORS in the SP500 have NEGATIVE year-over-year Earnings Growth, so far…
  2. MATERIALS, at -25.2% year-over-year, lead losers (but only 3 companies have reported)
  3. ENERGY has an #EarningsRecession report of -17.8% y/y and COMMUNICATIONS is running -14.2% y/y 


  1. FINANCIALS are pro-cyclically understating loan loss provisions (overstating earnings as revenues slow)
  2. COMMUNICATIONS isn’t that bad if you back out one of the most widely owned names (NFLX)
  3. ENERGY and MATERIALS are getting Quad4’d and are the only 2 SECTORS with down price performance y/y 

That last point isn’t really a caveat. It’s just a simple ROC (rate of change) fact that correlates the orbits of portfolio manager planets (returns) with the ROC of Sector Style Earnings Growth: 

  1. Since markets discount future GROWTH, INFLATION, and EARNINGS reports…
  2. ENERGY (XLE) and MATERIALS (XLB) are the only 2 SECTORS in the red looking back to 1-year ago today 

“So”… if you got The Cycle right for the last year now, you found a way to be long of the right SECTOR STYLES by simply getting rid of those that were going to get hit first (cyclicals) by ROC #slowing in Revenues and Earnings. 

Old Wall News now, I know. 

“So”… what’s new? What if COMMUNICATIONS, at DOWN -14.2% y/y EPS growth, continued? Oh boy. Only last quarter (Q119) COMMUNICATIONS reported aggregate y/y EPS growth of +13.3%. 

And back at The Cycle #Peak for US GROWTH, INFLATION, and PROFITS (Q2/Q3 of 2018), COMMUNICATIONS printed back to back EPS growth quarters of +37.6% and +27.5%, respectively! 

Oh, and back to the FINANCIALS, what happens when their CFO’s have to lap the +30.6% y/y EPS growth quarter they had in Q3 of 2018, as they finally take up loan loss provisions? 

Is that why my lovely UTILITIES (XLU) are up +14.6% y/y (as of today last year) vs. FINANCIALS (XLF) at a measly +1.6% y/y return? 

“So” many questions to ask and try to answer… and it’s still so early in Earnings Season, I know… but the real predictive power in our ROC #process is for intermediate-to-longer-term #FullCycleInvestors who want to get the longer-term (and larger) moves right. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now: 

UST 10yr Yield 1.99-2.15% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8077-8270 (bullish)
Utilities (XLU) 60.01-61.38 (bullish)
REITS (VNQ) 86.89-90.99 (bullish)
Financials (XLF) 27.61-28.33 (neutral)
VIX 12.01-16.05 (neutral)
EUR/USD 1.11-1.12 (bearish)
Oil (WTI) 54.01-58.12 (bearish)
Gold 1 (bullish)
Copper 2.64-2.75 (bearish)
FB 195-206 (bullish)
NFLX 299-353 (bearish)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Earnings Season Calculus - Earnings Better Than Expected Thus Far Will It Last