The market’s reaction to early corporate earnings this quarter was unusual, revealing an interesting disconnect between financial performance and investor reaction.
Traditionally, when companies exceed earnings per share expectations, their stock prices tend to rise. Yet this earnings cycle tells a different story.
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Companies that beat analyst expectations, on average, lose value compared to the broader market.
Kevin Gordonsenior investment strategist at Charles Schwab & Co, highlighted this subtle but important shift in market psychology.
“So far this earnings season, companies are underperforming the S&P 500 by 0.35% after earnings releases…that’s the worst spread since the fourth quarter of 2020,” Gordon wrote in a message on X.
The 0.35% underperformance versus the S&P 500 suggests that beating expectations is no longer a guarantee of stock gains after the report.
Examples include Blackstone, Inc. (NYSE:BX), which fell on Thursday after losing on the top and bottom lines, and Coca Cola Co. (NYSE:KO, )), which faded after a strong double on Wednesday.
‘Thanks, but no thanks’
Several factors may explain this counterintuitive response.
Expectations for this earnings season were already high and investors may have already ‘priced in’ strong results in advance. When good news becomes the norm, even companies that produce solid numbers can face investor indifference or mild profit-taking.
Broader macroeconomic concerns continue to weigh on sentiment, and softer fourth-quarter expectations have introduced a degree of caution.
Investors could exit stocks, especially in sectors that appear fully valued, even if individual companies are performing well.
The discrepancy between earnings per share and stock performance points to a maturing phase of the market cycle. Solid gains are no longer enough to spark rallies; investors want evidence of continued growth in an increasingly uncertain environment.
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Photo: Image created using artificial intelligence via Midjourney.
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