This earnings season has been great for the companies reporting results. For their stocks? Not so much.
A mix of high expectations, profit-taking, and a slight dip in valuations has sent most large-cap stocks sputtering even after solid earnings reports.
According to Dow Jones Market Data, 432 companies in the S&P 500 had reported earnings this quarter as of Thursday morning, and 364 beat analysts expectations for earnings per share. Of those 364 companies, however, the majority have seen their shares fall the next trading session.
We get a new example seemingly every day. Advanced Micro Devices tumbled 7% on Wednesday after a decent report. Western Digital followed that up Thursday with its own earnings beat -- plus a 13% drop.
It isn't like companies are predicting a downturn ahead, either. Several big names, such as Cigna Group, GE Aerospace, and Johnson & Johnson, fell after both beating estimates and raising their fiscal-year guidance.
"Management teams are expressing less caution than at almost any point since COVID," Julian Emanuel of Evercore wrote in a note Thursday.
Some deviation between results and share price is natural since a high volume of earnings beats are expected each quarter. In most reporting periods, at least 75% of S&P 500 members beat earnings expectations. That number is 84% this quarter -- strong but not an outlier.
The price reactions to beats and misses have also been within long-term averages, said Jonathan Golub, chief equity strategist at Seaport Research Partners, in a note Thursday.
But this earnings season has still felt unusual compared with previous quarters, said Kim Forrest, chief investment officer at Bokeh Capital Partners. For an earnings print to get the market's blessing, "it has to be absolutely perfect."
Northrop Grumman, for instance, fell 2.2% after delivering a beat-and-raise quarter that may have relied too heavily on lower taxes. United Parcel Service cleared analyst forecasts and boosted guidance, but investors seemed to want an even stronger outlook. The stock fell 6.6%.
You can continue down the list: United Airlines' issue was likely higher fuel costs; Johnson & Johnson's was relative weakness in certain parts of the business; Alphabet's was too much capital investment.
While the reasons may change, investors are looking closely for blemishes and often finding them. They have been particularly hard on stocks tied to the artificial-intelligence boom, which have soared over recent quarters and spurred higher expectations.
"Investors are sitting on significant gains with some of their AI-related investments and are on edge about whether the AI investment cycle will continue," Gil Luria, an analyst at D.A. Davidson, told Barron's.
The good news is quarter-to-quarter earnings reactions won't make or break most portfolios. For those investing with a traditional long-term horizon, excellent results followed by a dip are preferable to brutal results followed by an inexplicable rise.
S&P 500 earnings this quarter have climbed 32% year over year after excluding unrealized capital gains, Golub, the Seaport analyst, calculated. Of the 11 major sectors, only healthcare has seen earnings decline.
Golub called this quarter the best earnings season of all time outside of a recession recovery. That may sound hyperbolic, but the numbers don't lie.
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