Earnings season failed to sustain the stock market’s gains over the past week.
After soaring to all-time highs at the start of the year, the S&P 500 (^GSPC) fell sharply in April as rising bond yields and fading expectations of Federal Reserve rate cuts dampened investor enthusiasm.
And even good earnings aren’t going to hurt stock prices, given the big gains in the stock prices of some of the biggest players in the market rally.
“There’s a lot of market indigestion during earnings season,” Julian Emanuel, head of equity, derivatives and quantitative strategy at Evercore ISI, told Yahoo Finance.
That’s the general pattern in stock price reactions the day after the quarterly earnings reports of the 65 S&P 500 companies that have reported earnings so far this season. Emanuel’s research shows that stocks that beat Wall Street expectations rose 0.8% in the next trading session, slightly lower than the 0.9% average over the past few years.
Meanwhile, companies that disappoint on both measures are hit harder than usual, with their stock prices falling 5.8% on average in the next trading session, compared with the typical 3.1% decline over the past five years.
“Considering these expanded assessments [in the S&P 500]”Even if it’s good news, it might not be great news, especially for a stock that’s gotten this far,” Emanuel said.
Emanuel highlighted the recent stock price movement after JPMorgan (JPM) reported earnings that beat Wall Street expectations on both revenue and earnings per share. But the stock, which had hit multiple all-time highs earlier this year, fell on the day of the report after the company didn’t raise its 2024 interest income outlook as analysts had hoped.
Scott Kronert, U.S. equity strategist at Citi, echoed Emanuel’s view following the price moves.
“Markets are pricing in an increasing probability of a Goldilocks scenario coming to fruition this year, raising downside risks to ‘good but not good enough’ news,” Cronath wrote in a client note the day JPMorgan released its earnings. “While it is still very early, the banks’ first set of reports for the first quarter highlight the risks of falling short of the lofty growth expectations implied in their guidance, even as overall fundamentals remain healthy.”
A similar situation played out on Friday when Netflix (NFLX) beat Wall Street’s profit and revenue expectations and touted earnings per share growth of more than 83% year over year. But investors seemed preoccupied with things like the fact that second-quarter revenue was expected to be $9.49 billion instead of $9.51 billion. The company’s shares, which had risen more than 150% over the past 18 months, fell more than 8% on Friday.
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Mark Mahaney, an analyst at Evercore ISI, said the main reason the stock fell after the report was “because expectations were high, and it wasn’t a bigger-than-expected increase.” [guidance] quarter.”
The Netflix logo appears in this photo posted on the company’s website in New York, Feb. 2, 2023. (Associated Press/Richard Drew, File) (The Associated Press)
This comes as investors are set to experience one of the busiest quarters of financial announcements for the S&P 500. Meta (META), Microsoft (MSFT) and Alphabet (GOOGL, GOOG) are headlining the earnings week, with all three facing tough comparisons. Meta is expected to see revenue grow by more than 96%, according to Bloomberg data, while analysts expect Alphabet’s revenue to grow by more than 30% this quarter compared to last year. Microsoft is expected to grow by nearly 16%.
All three stocks are among the top 10 by market capitalization in the S&P 500 index, and Goldman Sachs said on April 5 that it expects them to drive the index’s earnings growth this quarter. The top 10 stocks in the S&P 500 index, primarily the “Magnificent Seven,” are expected to see earnings increase 32% in the first quarter, while the other 490 stocks are expected to see earnings fall 4%.
Given the market’s recent jitters over rising yields and the lack of hope for a Fed rate cut, the performance of these companies will be “pivotal” to the market’s direction going forward, said Liz Young, head of investment strategy at SoFi. I posted on X (formerly Twitter) on Friday.
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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