Why the stock market is having 'digestion problems' this earnings season

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Earnings season hasn't been able to keep the stock market rally afloat over the past week.

After an aggressive rally to all-time highs to start the year, the S&P 500 (^GSPC) has tumbled in April as rising bond yields and slimmed expectations for Federal Reserve interest rate cuts have put a damper on investors' enthusiasm.

And given the significant rise in share price of some of the market rally's darlings, even strong earnings aren't moving the needle for stocks.

"The broader market is having digestion problems in and around this earnings season," Julian Emanuel, who leads Evercore ISI's equity, derivatives, and quantitative strategy, told Yahoo Finance.

This has broadly been seen across stock reactions in the day following the release of quarterly results for the 65 S&P 500 companies that have reported results so far this season. Stocks that top Wall Street's estimates have risen 0.8% in the next trading session, slightly lower than the 0.9% average seen over the last few years, per Emanuel's research.

Meanwhile, companies that disappoint on both metrics are taking a bigger hit than normal, with the average stock falling 5.8% in the next trading action, compared to the usual 3.1% decline seen over the past five years.

"Given these extended valuations [in the S&P 500], even good news may not be good news, particularly in these names that have run as far as they have," Emanuel said.

Emanuel highlighted the recent price action following JPMorgan's (JPM) results, which topped Wall Street's estimates for both revenue and earnings per share. But the stock — which had hit multiple record highs earlier this year — traded lower on the day of its earnings report as the company didn't boost its 2024 interest income guidance like analysts had hoped.

Citi US equity strategist Scott Chronert echoed Emanuel's sentiment following the price action.

"Markets have priced in a higher probability of the Goldilocks scenario playing out this year, introducing more downside risk to 'good but not good enough' news," Chronert wrote in a note to clients on the day JPMorgan reported earnings. "While very early, the first set of 1Q reports from the banks highlights this risk of guidance falling short of lofty implied growth expectations, even as the overall fundamental picture remains healthy."

A similar narrative played out Friday after Netflix (NFLX) topped Wall Street's earnings and revenue estimates, flexing earnings per share growth of more than 83% from the year prior. But investors appeared hung up on revenue guidance for the second quarter, which came in at $9.49 billion instead of $9.51 billion, among other factors. The stock, which had rallied more than 150% in the past 18 months, sold off more than 8% on Friday.