Yahoo Finance Companies face a 'sell the news' market reaction to good earnings results right now
Stocks aren't moving on earnings beats like they usually do.
An analysis from FactSet shows 79% of S&P 500 companies have beat Wall Street expectations for earnings per share in the current reporting period. While that's better than the average over the last 10 years, stocks have actually reacted worse than normal.
Stocks that beat the Street's estimates for earnings per share have fallen 0.5% on average in the next trading session. Over the past five years, stocks have normally risen 1% after an earnings per share beat.
With more than 80% of the S&P 500 done reporting earnings, stocks haven't reacted this negatively to earnings beats since 2011.
"This represents a sell the news dynamic for the market broadly as it begins to call into question how robust the 2H recovery that consensus expects will ultimately be into a period of weak seasonality for EPS revisions," Morgan Stanley Chief Investment Officer Mike Wilson wrote on Monday.
Savita Subramanian, Bank of America's equity and quant strategist, described stock reactions to earnings positive guidance as "perverse" this quarter. Subramanian added that earnings reactions have been "muted to negative" after the "FOMO" chase in stocks over the last several months. Notably, many of those stocks that were chased with AI exuberance haven't moved to the upside this quarter either.
The S&P 500 increased 10% from the beginning of May to the end of July. But over the past week, Fitch downgraded the US government's credit rating and big tech earnings came in as a mixed bag, casting a shadow over markets.
"We see a market more vulnerable to bad news as stocks have become extended on a short-term basis," Keith Lerner, Truist co-chief investment officer, wrote in a note on Aug. 4. "Valuations have pushed to one of the richest levels of the past few decades."
EvercoreISI Senior Managing Director Julian Emanuel tracks the next day stock price reaction after each earnings report in the S&P 500. Through Aug. 4, stocks that have missed on earnings per share but beat on revenue have been punished the most this quarter, falling 3.2% on average the next day, double the average loss over the past four years.
But sales misses have been in focus more this quarter as companies that have missed those estimates while beating earnings per share projections have fallen 2% the next day, compared to a 0.4% loss on average over the last five years.
Wilson at Morgan Stanley sees this shift as an important market moment this earnings season. For now, investors are caring less about earnings beats than normal and punishing sales misses more than usual.
"2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting," Wilson wrote on July 24. "However, disinflation is now eating into sales growth, which means investor focus is likely to shift toward top line growers rather than just companies exhibiting cost efficiencies."
Josh Schafer is a reporter for Yahoo Finance.
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