Jan 28, 2023
Stock-Market Vigilantes Dial Back Penalties for Earnings Misses
(Bloomberg) -- Stock-market investors are looking to earnings next week from Apple Inc., Amazon.com Inc. and Meta Platforms Inc. for signs of whether Wall Street’s projections are too optimistic as the US economy cools.
But as signs of a slowdown mount, there’s a silver lining: Battered by last year’s bear market and long focused on the risk of a potential recession ahead, the stock market is rewarding companies that exceed expectations and dialing back the punishment of those that fall short. That’s a signal that a lot of bad news has already been priced in.
The S&P 500 has advanced some 2.4% since earnings season began two weeks ago even as the number of its members that beat on earnings lagged early in the cycle, data compiled by Societe Generale show.
All told, companies in the S&P 500 that have exceeded projections on both earnings per share and sales have outperformed the S&P 500 by an average of 1.45% within a day of reporting, exceeding the norm of the past six years, according to data compiled by Bloomberg Intelligence. And those that fell short underperformed the broader market by just 1.7%, the least negative reaction in eight quarters, as many companies report taking steps to adjust to shifting business conditions.
“A lot of companies have announced restructuring efforts and cost-cutting plans, which has helped create more confidence among investors that companies can get through slowing economic growth,” said Wendy Soong, a senior associate analyst at Bloomberg Intelligence. “That’s why we’ve seen more upward rewarding for stock prices this time around than previously.”
The reports next week from the megacap tech companies come after disappointing outlooks from Microsoft Corp. and Intel Corp. this week. On Friday, Intel fell more than 7%, dragging down other chip stocks, after the semiconductor company forecast one of the worst quarters in history. But Microsoft’s warning of a sales slowdown had far less impact on the company’s stock, which is poised to finish the week higher despite the outlook.
So far this earnings season, the biggest post-report gainers have included SVB Financial Group, the parent company of Silicon Valley Bank, and Lamb Weston Holdings Inc., a US food processing company. On the other end of the spectrum, financial services firm Northern Trust Corp. and investment bank Goldman Sachs Group Inc. have dropped the most.
Overall, though, those who used options to wager on post-earnings rallies have seen one of the best runs in years, underscoring the more bullish atmosphere. Traders who bought single-stock call options — or the right to purchase shares — five days ahead of an earnings release this reporting season have reaped a 29% average return on premium, or the amount paid for the option, data compiled by Goldman Sachs show.
Next week’s results will coincide with the Federal Reserve’s first interest-rate decision of the year on Wednesday. While the central bank is widely expected to deliver a quarter-point rate hike, investors are looking for signals that it will soon stop tightening monetary policy. Speculation about such a pause has fueled outsized gains this year for growth stocks, whose valuations are more sensitive to changes in interest rates.
So far, US companies are beating earnings estimates slightly better than during the previous quarter, which could mean Wall Street projections were relatively pessimistic for the final three months of 2022. About 72% of firms have posted better-than-expected earnings in the fourth quarter, up from 70% in the third quarter but down from 76% a year earlier, data compiled by Bloomberg Intelligence show.
“For now, investors are hoping that the Fed will throw down its gauntlet at the upcoming meeting, with markets anticipating that it could be the final rate hike of this cycle,” said Scott Colyer, chief executive at Advisors Asset Management. “But the next batch of tech earnings could change the current market environment depending on what management teams say about their outlooks, while any pause in rate hikes from the Fed may not come until later this year.”
Elsewhere in corporate earnings:
Story Link: Stocks Vigilantes Dial Back Punishment of Misses: Earnings Watch
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