Yahoo Finance Investors had no tolerance for poor earnings in Q3
In the third quarter, investors had no patience for earnings misses.
In a note to clients published last Friday, Goldman Sachs’ equity strategy chief David Kostin affirmed a theme that had been burgeoning at the outset third quarter earnings season six weeks ago and which came to pass in spades as results rolled in — companies that missed expectations got hammered. Especially when it came to revenue misses.
“Investors rewarded relatively scarce sales beats and harshly punished both sales and EPS misses,” Kostin wrote. “Only 31% of S&P 500 firms reported a sales beat (vs. 35% historically). A stronger trade-weighted US dollar (+3% vs. 3Q 2017) was one revenue headwind… Investors penalized firms more than usual when they missed on revenues (-224 bp underperformance vs -129 bp historically) and when they missed on EPS (-267 bp vs. -211 bp).”
Companies that got pounded by investors after reporting light sales in the third quarter included some of the market’s biggest leaders — Amazon (AMZN), Facebook (FB), Alphabet (GOOGL), and Netflix (NFLX) all reported revenue that missed forecasts. Apple’s (AAPL) quarter reported lighter-than-expected iPhone sales and revenue guidance that was shy of estimates.
Shares of Amazon, Netflix, and Apple all fell more than 7% after their quarterly reports.
But the penal nature of the market during this earnings season should not be entirely surprising.
From the second week of October through last Friday’s close — which covers the period when the bulk of third quarter results were reported — the S&P 500 fell nearly 4%. October as a whole was worse, with the benchmark index dropping 7% for its worth monthly performance since 2011.
Stocks hit record highs just before the third quarter earnings period began, and with the benefits of tax cuts and the U.S. economy enjoying the fastest GDP growth in at least four years, the tailwinds for corporates were obvious. Expectations may have been lofty, but given this backdrop investors having a low tolerance for missing estimates makes sense.
The market’s reaction to third quarter earnings does not, however, negate the fact that the reporting period overall was quite strong. With 90% of the S&P 500 having reported quarterly earnings through last Friday, Goldman notes that earnings per share growth for S&P 500 members has come in at 27% with revenues growing 12% over last year.
And even without the benefits of tax cuts, the third quarter was a strong one for corporate America — pretax earnings have growth 14% over last year through the first three quarters of the year.
The market’s reaction to third quarter earnings and the year’s broader trading action which has been punctuated by three sharp pullbacks makes us recall data highlighted by analysts at Bank of America Merrill Lynch back in February that said during years when S&P 500 earnings have grown by double-digits in half of the 29 years the benchmark index has declined over the last 90 years.
Which is a simple reminder that stock prices reflect expectations about future corporate performance, not mechanisms to reward the most recent quarterly report.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
