The current earnings season has seen companies with disappointing quarterly results being punished more severely than usual. According to FactSet, second-quarter earnings misses have resulted in an average 3.8% decline for a stock from two days before the quarterly release through the two days after the report comes out. This is higher than the five-year average price decrease of 2.3% for companies that disappointed. On the other hand, companies that beat Wall Street expectations have been rewarded less than average, with only a 0.3% rise during the same period, compared to a five-year average price increase of 1%.
These results highlight the high expectations going into this earnings season, as well as concerns about an overheated stock market. The S & P 500 has already gained more than 14% this year and is currently trading at 21 times forward earnings. As Peter Boockvar, chief investment officer at Bleakley Financial Group, pointed out, some stocks have already reached high valuations, making it challenging for them to meet or exceed expectations during earnings season.
Recent examples of companies facing significant stock price declines following disappointing earnings include Ford Motors, whose shares plunged more than 18% after falling short of earnings expectations due to warranty costs, and Dexcom, which tumbled 40% after reporting disappointing revenue and offering weak guidance. These instances illustrate the harsh reality facing companies that fail to meet market expectations.
Interestingly, even companies that deliver stellar results may not see a significant increase in stock prices. For instance, JPMorgan Chase saw its shares dip 1% on July 12 despite exceeding profit and revenue expectations, with investment banking fees surging 52% from a year earlier. This disconnect between performance and stock price reaction underscores the complexities of the current market environment.
Investors are closely monitoring the ongoing rotation within the market, with a shift towards small-cap shares and cyclical names as investors move away from winning megacap names. This rotation suggests a more risk-off mentality among investors, which can lead to short-lived drawdowns in stock prices. As John Belton, portfolio manager at Gabelli Funds, noted, there is a backdrop of rotation and risk aversion in the market that is influencing stock reactions to earnings reports.
With companies like Microsoft, Meta Platforms, Apple, and Amazon set to report their earnings this week, investors will be closely watching how the market reacts to their results. The current trends indicate a cautious approach by investors, with a focus on company fundamentals and market conditions shaping stock price movements in the coming weeks.