“IBM’s poor earnings performance in the first quarter likely foretells a rough time ahead for the stock market.
In an after-the-bell report Thursday, the information technology leader missed narrowly on bottom-line profit but widely on top-line revenue. Profit of $3 a share missed Wall Street estimates by a nickel, while revenue of $23.41 billion fell short of hopes for $24.62, a 5 percent whiff.
As a result, traders punished IBM in Friday action, with the shares closing down more than 8 percent.
IBM has been underperforming the market the way it is, dropping 10.9 percent over the past month while the Standard & Poor’s 500 has risen about 0.2 percent.
The earnings report may well confirm weakness both in the company and broader market.
IBM earnings, in fact, have served as a highly efficient proxy for market movement going all the way back 10 years, according to research from Bespoke Investment Group.
While many investors focus on Alcoa because it kicks off earnings season, as a barometer, IBM has proved more efficient.The company’s stock movement immediately after earnings has had a stunning 75 percent success rate in predicting market movement over the next five weeks.
More recently, the correlation has been perfect over the past five quarters. In the three times IBM rose after earnings, the S&P 500 also gained. Likewise, the correlation held in the two quarters when the company’s stock fell.
In the 10-year period, the trend has been more accurate when IBM has a positive earnings reaction, with the market up 80 percent of the time. Negative earnings have correlated with market movement at a 70 percent rate, Bespoke found.
“Part of the explanation lies in the fact that IBM generates more than half of its revenues from its services unit, which has a presence in practically every S&P 500 company,” Bespoke said. “Any weakness in the performance of corporate America (or even the corporate world) will likely show up in the results of IBM.” …”
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