Why is the financial report season performing well, but the S&P is still falling?
Despite better-than-expected financial performance during earnings season, the S&P 500 index continued to decline. Investors have expressed doubts about the company's profitability and growth prospects, which is the main reason for the stock price drop. Even when performance exceeds expectations, stocks typically only rise by an average of 0.8% the next day, lower than historical levels. On the other hand, companies with performance below expectations see an average stock price drop of 5.8%, exceeding the average decline of the past 5 years. The S&P 500 index has been underperforming due to rising bond yields and weakening expectations of a Fed rate hike. Both good and bad news have resulted in lackluster performance in the overall stock market. There has been a "digestion issue" in the market before and after earnings season, where regardless of performance, S&P 500 component stocks have shown poorer performance the day after compared to previous years. Even positive news may not necessarily receive a good response, especially for stocks that have already experienced significant gains
During the critical period of the company's performance release this quarter, the market's cautious response to better-than-expected performance has been evident. Despite most companies that have reported their performance exceeding Wall Street's expectations, it has failed to drive a significant increase in stock prices. In fact, some companies with better-than-expected performance experienced a sharp decline on the day of their financial report release.
Analysts point out that investors' doubts about the company's profitability and concerns about future growth prospects are the main reasons for the sell-off.
Strong Financial Performance in Earnings Season but Weak Stock Market Performance
The S&P 500 index hit a historical high earlier this year, but experienced a significant pullback in April, narrowing its year-to-date gains. Under the impact of rising bond yields and the weakening expectation of Fed rate hikes, even strong earnings in the earnings season have struggled to sustain a continued rebound in the overall stock market.
Julian Emanuel, Head of Equity and Derivative Strategy at Evercore ISI, stated:
"There has been a 'digestion issue' in the market around this earnings season. Among the 65 S&P 500 component stocks that have reported earnings, regardless of performance, their stock prices the next day have been worse compared to previous years."
He also found that during this earnings season, stocks that exceeded expectations only rose by an average of 0.8% the next day, lower than the historical average of 0.9%; while stocks that fell short of expectations saw an average decline of 5.8%, significantly higher than the historical average decline of 3.1% over the past 5 years.
Emanuel believes that given the valuation growth of the S&P 500 index, even good news may not necessarily receive positive feedback, especially for stocks that have already experienced significant gains.
Taking JP Morgan as an example, although the bank's latest earnings revenue and EPS exceeded expectations, the stock price fell on the day as it did not raise its 2024 interest income guidance as analysts had expected.
Streaming giant Netflix's financial report released last Friday also exhibited similar characteristics. Despite an 83% year-on-year growth in EPS and revenue and profits surpassing Wall Street's expectations, Netflix's second-quarter revenue guidance of $9.49 billion was lower than analysts' expected $9.51 billion, leading to an 8% drop in the company's stock price on the day.
Analysts believe this is mainly due to investors having overly high expectations for Netflix's future growth. It is worth noting that the stock had doubled in the past 18 months.
Scott Kronert, US Stock Strategist at Citibank, shares a similar view. He believes that in the current market environment, "not good enough" good news may bring downside risks. Even if a stock's overall fundamentals remain healthy, if guidance falls below the market's high implicit growth expectations, the stock performance may be relatively weak.
Top Ten Market Cap Stocks Expected to Increase Earnings by 32%
Looking ahead to this week, investors will face the busiest week of financial reports for the S&P 500 index. Tech giants Meta, Microsoft, and Google's parent company Alphabet will be in focus as they reshape the competitive landscape in emerging technology areas such as artificial intelligence and cloud computing. Analysts expect Meta's earnings to grow by over 96% this quarter, Alphabet by over 30%, and Microsoft by nearly 16%All three companies are among the top ten market cap stocks in the S&P 500 index. Goldman Sachs previously pointed out that their performance will lead the overall profit growth of the index. Specifically, the combined earnings of the top ten market cap stocks in the S&P 500 (mainly tech giants) are expected to grow by 32% in the first quarter, while the earnings of the other 490 stocks are expected to decline by 4%.
Overall, although corporate performance is generally positive this quarter, investors are cautious about earnings guidance and show skepticism towards high profit growth expectations. On one hand, some companies that have exceeded expectations have not received the appropriate stock price feedback; on the other hand, stocks with doubts about their profit capabilities are more likely to be sold off due to poor performance. This attitude reflects investors' uncertainty about the outlook for the U.S. economy, as well as concerns about major issues such as inflation and the path of interest rate hikes.
In the coming period, as more companies continue to announce their earnings, investors will face ongoing challenges. For companies with doubts about their performance, it is necessary for them to further clarify their growth prospects; for companies recognized by the market, they need to continue to meet and exceed shareholders' high expectations in order to drive the stock price further upwards