After stock market's torrid run, earnings misses face punishment

The Star

2 days ago

NEW YORK: The second-quarter earnings season is off to a ripping start, with consumer strength powering resilient corporate profits.
In the stock market, however, the reaction has been fairly quiet, an ominous sign that much of the good news is priced in - and investors are punishing disappointments.
Take financials, which reported blockbuster numbers this week that failed to juice their shares.
'Financials have crushed second quarter earnings expectations with a 94.4% beat rate so far, yet stocks saw only muted reactions as investors largely anticipated the results,' Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper wrote in a note last Friday.
Similarly, streaming platform Netflix Inc exceeded outlooks in every major metric, and United Airlines Holdings Inc was upbeat about travel demand gaining steam. Yet, investors largely reacted to these numbers with a collective shrug.
Netflix closed down over 5% last Friday despite its strong performance.
'With stock valuations where they are, all the good news is priced into the market now,' said Greg Taylor, chief investment officer (CIO) at PenderFund Capital Management Ltd.
What's more, the market is penalising results that fall short of expectations by the most in nearly three years, data compiled by Bloomberg Intelligence showed.
'The margin of error here is small,' said Michael Arone, chief investment strategist at State Street Investment Management.
'When the valuations are high and you miss, the punishment is more severe.'
Combined profit and revenue beats, on the other hand, are being rewarded by only the most in a year.
'At an index level, good earnings are not likely the broad market catalyst investors are waiting for,' said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI.
The S&P 500 Index closed near an all-time high Friday, after notching seven new records in just 15 sessions.
The equities benchmark is trading at 22 times expected 12-month profits and is fast approaching the level it hit in February, before April 2 when President Donald Trump unleashed his global tariffs that weighed on sentiment.
This week, investors will get results from a slew of Big Tech giants including Alphabet Inc and Tesla Inc, industrial behemoth Honeywell International Inc, chemicals maker Dow Inc, defence contractors Lockheed Martin Corp and Northrop Grumman Corp, and auto manufacturer General Motors Co, among many others.
Big US banks delivered an earnings bonanza based on record-breaking trading revenues, as the volatility sparked by Trump's tariff offensive ignited market activity at some of Wall Street's biggest firms.
Still, the share moves were underwhelming.
Goldman Sachs Group Inc equities traders posted the largest revenue haul in Wall Street history, but the company's shares rose less than 1% on the day it reported earnings.
Even worse, Morgan Stanley's net revenue topped estimates and the shares closed down 1.3%.
And JPMorgan Chase & Co's stock traders notched their best second quarter ever, while fixed-income trading trounced expectations, yet the stock dropped 0.7%.
Still, market pros noted that the powerful bank earnings offer an encouraging indication for the overall economy.
'Banks can only be healthy when the economy is strong,' said Mark Malek, chief investment officer at Siebert.
'So their earnings along with their commentary serve as a broader benchmark on economic health.'
The durability of the US consumer has been a major question for investors and economists, especially in the face of still-high inflation, elevated interest rates and continued uncertainty about the new US trade regime.
The initial signs are encouraging based on earnings from airlines to PepsiCo Inc to Netflix to jeans-maker Levi Strauss & Co.
'The consumer remains strong,' Malek said.
'That is paramount.'
Travel in the United States is recovering with the approval of Trump's tax cut and spending package and negotiators appearing to make progress in tariff discussions, Delta Air Lines Inc chief executive officer Ed Bastian said.
PepsiCo's North American business improved and it saw strong growth in international markets.
Netflix raised its full-year forecast.
And Levi Strauss said it expects sales growth to outweigh the impact of Trump's tariffs.
Retail sales figures last Thursday offered proof of this continued strength.
Commerce Department data showed the value of retail purchases, not adjusted for inflation, increased 0.6% after declines in the prior two months, exceeding nearly all estimates in a Bloomberg survey of economists.
'So far it has been a thumbs up from earnings,' Malek said. — Bloomberg