Are Disappointing Earnings Reports Taking a Toll on Stocks?
When companies report disappointing quarterly results, the stock market tends to react swiftly. According to FactSet, second-quarter earnings misses have led to 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 investors. On the flip side, companies that beat Wall Street expectations are not being as generously rewarded as usual, with only a 0.3% rise during the same period compared to the five-year average of 1%.
This trend underscores the high expectations that were prevalent going into this earnings season. The stock market, which has gained over 14% this year and is trading at 21 times forward earnings, is viewed by many as overheated. As Peter Boockvar, chief investment officer at Bleakley Financial Group, pointed out, “Some stocks that have done well this year have already created a high bar for earnings season, that even if EPS estimates are beat, the stocks have already rallied into them.”
Recent examples include Ford Motors, whose shares dropped more than 18% after falling short of earnings expectations due to warranty costs, and Dexcom, which tumbled 40% following disappointing revenue and weak guidance. Even companies that delivered stellar results, such as JPMorgan Chase, did not necessarily see a positive reaction in their stock prices.
Despite these challenges, the stock market has shown signs of resilience. The tech-led rally of this year has begun to broaden out to small-cap shares and cyclical names as investors rotate out of winning megacap names. This rotation, along with a more risk-off mentality in the market, could lead to short-lived drawdowns.
This week’s earnings slate, which includes companies like Microsoft, Meta Platforms, Apple, and Amazon, will be closely watched by investors. As the earnings season continues, it will be interesting to see how the market reacts to both positive and negative results.
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