S&P 500 companies report bumper earnings but stocks not rewarded

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It takes big corporate earnings and earnings forecasts to convince investors this season, after a record first-quarter rally made stocks look expensive.

S&P 500 companies are more than halfway through the reporting period, and 79 percent of them beat earnings expectations, according to data compiled by Bloomberg Intelligence. However, the average stock outperformed the index by less than 0.1 per cent on results day – the smallest margin since late 2020.

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Companies that miss expectations suffer the worst penalty in data records going back to 2019, where they lagged the S&P 500 by an average of 3.7 percent.

Examples abound. On Wednesday, shares of Cruise Line Holdings Ltd. fell. Norwegian rose by 15 percent despite results that exceeded expectations and improved profit expectations. the reason? High expectations fueled by the outcome of a competing cruise ship. On the same day, Eaton Corp stock fell. Energy Management PLC, as investors were impressed by its earnings that exceeded expectations.

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Europe was not spared this distress either. Shares of Novo Nordisk A/S, which makes the weight-loss drug Wegovy, fell even as it raised its profit forecasts.

Many believe the main reason is that the Standard & Poor's 500 index rose 28 percent from its lowest levels in October to the end of March, which led to increased expectations of strong earnings. Markets at the time were also betting on multiple interest rate cuts by the US Federal Reserve, a tailwind that has now all but disappeared.

Michael O'Rourke, chief market strategist at JonesTrading Institutional Services LLC, said the price-to-earnings ratio of more than 20 points made the index “close to perfect.” “So, when a company disappoints, prices are likely to adjust sharply.”

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Fears of stagflation

He added that the resilient US economy makes it “difficult to have confidence in the future of a faltering company.”

US stocks fell after hitting a record high in March, amid signs that the Federal Reserve will postpone interest rate cuts amid sticky inflation. Stagflation fears have resurfaced as US economic growth registered a surprising slowdown in the latest quarter. Investors are therefore keen for clues on how management teams plan to overcome declining consumer confidence.

Here too there was some disappointment.

Bespoke Investment Group LLC data shows that on average, 4.4 percent of U.S. companies raised guidance this quarter, the smallest percentage since the same period in 2020, when the COVID-19 pandemic upended economic expectations.

Many companies that came in with strong forecasts reaped the rewards. Eli Lilly And Co., for example, rose by the most since August 2023 as the popular obesity drug enabled it to boost full-year revenue guidance. NXP Semiconductors NV stock rose after issuing upbeat goals for the second quarter. Social media company Snap Inc., industrial equipment company Trane Technologies PLC, and chipmaker Amkor Technology Inc. were also in attendance. Also among the beneficiaries of the strong outlook.

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But even before earnings season, options markets were pricing in smaller earnings-driven moves on average compared to the previous quarter, according to data from JPMorgan Chase & Co. Meanwhile, investors were bracing for higher earnings-related volatility in the year and a half, the figures showed.

Strategists at the bank, including Mislav Matejka, had warned in mid-April that the strong season would not translate into stock market gains because investor positions were already “too stretched.” Michael Wilson, chief investment officer at Morgan Stanley, also blamed the jump in Treasury yields for taking the shine off earnings.

The burden of artificial intelligence

Another sensitive area for investors is artificial intelligence. After stocks have surged for about a year driven by the AI ​​craze, they want to see evidence of how companies are adopting the technology, said Lori Calvasina, a strategist at RBC Capital Markets.

“I see an intolerance for the ‘we have to be patient’ conversation,” she said in an interview with Bloomberg TV. “Investors don’t seem to have a lot of patience for that.” “Wait and see, this will take time.”

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Not everyone is pessimistic about the season.

A strong scorecard from S&P 500 companies has already prompted analysts to raise targets for the second quarter, in contrast to the 1 percent cut that is typical at this point in the season, strategists at Deutsche Bank AG said.

But the onus for further stock gains falls squarely on earnings, given higher valuations and tighter interest rate expectations, said Scott Krohnert, head of US equity strategy at Citigroup.

“So far, earnings season has been mostly a volatile event,” he said.

– With assistance from Carly, Anna, and Allegra Catelli.

bloomberg.com

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