With US stock valuations remaining persistently high, the earnings season is transforming into a genuine "two-way bloodbath" – surpassing profit expectations no longer guarantees a stock price increase, while even minor flaws can lead to severe punishment. The market's tolerance for corporate earnings missteps has hit a low point.
Data from Citigroup reveals a significant rise in the number of S&P 500 companies experiencing stock price swings exceeding 10% on their earnings report days since 2024. This figure has reached 30 to 40 companies in multiple quarters, and even surpassed 60 in the first quarter of this year, far exceeding the typical range of just 10 to 20 per quarter seen over the past decade. This indicates that substantial daily volatility is increasingly becoming the new normal for US stocks during earnings season.
More critically, the profit hurdle for this earnings season is also being continuously raised. Analysts, contrary to their usual practice of steadily lowering forecasts throughout the year, have instead been raising predictions throughout the second quarter. This has stripped companies of their traditional "safety cushion." Against this backdrop, merely delivering results that "beat expectations" is no longer sufficient to convince the market.
Beating Expectations Can Still Lead to Declines
Samsung Electronics reported a second-quarter operating profit that surged approximately 19-fold year-over-year and exceeded market forecasts, yet its stock price plummeted 7% in a single day. PepsiCo posted quarterly revenue above expectations, but its shares still closed down 3.3%. In stark contrast, Micron Technology's stock soared over 16% in one day on June 25th after announcing better-than-expected results and guidance, marking the company's best-ever single-day performance following an earnings report.
The vastly different market reactions to similarly "better-than-expected" results highlight that investors are now more focused on earnings quality, future guidance, and whether valuations are justified.
According to Citigroup's statistics, the count of S&P 500 companies with daily price moves over 10% on earnings days has been climbing steadily in recent years. Mark Hackett, chief market strategist at Nationwide, noted that this high volatility during earnings seasons has been a near-constant feature for almost the past two years, with elevated overall market valuations being a key reason. He stated that only after earnings are released can the market judge whether prior valuations were reasonable.
Earnings Forecasts Unusually Revised Upward, Eliminating Corporate "Safety Net"
The most significant change this earnings season, compared to previous years, is that profit expectations have not been lowered.
Conventionally, analysts gradually reduce earnings forecasts as a quarter progresses, creating an easier comparative base for companies to exceed. However, FactSet data shows that from March 31st to June 30th this year, the bottom-up earnings per share estimate for the S&P 500 was actually revised *up* by 3.4%. In contrast, the average revision over the same period in the past five years was a 2% cut, and a 2.7% cut over the past ten years.
In other words, companies are facing a continuously rising benchmark.
Anthony Saglimbene, chief market strategist at Ameriprise, noted that similar to last quarter, there is virtually no traditional earnings expectation buffer this reporting season. He believes the market now places greater emphasis on whether companies can deliver on full-year guidance, maintain profit margins, and provide positive management outlooks, rather than just whether they beat single-quarter profit estimates.
"Beating Expectations" Is No Longer the Finish Line
Analysts project S&P 500 earnings per share to grow 23.3% year-over-year in the second quarter, up from the 18.8% forecast at the end of March. Revenue is expected to grow 12.2%. If realized, this would mark the second consecutive quarter of over 20% earnings growth for the index and the fastest revenue growth rate since the second quarter of 2022.
However, with market expectations already so elevated, merely exceeding profit estimates is becoming increasingly insufficient to drive stock prices higher.
Saglimbene argues that companies need to simultaneously demonstrate that profit margins remain robust, full-year guidance has not deteriorated, and that earnings growth is broadening out from a few AI and tech leaders to a wider range of industries before the market will be willing to assign higher valuations.
Hackett points out that even within the same industry, stock performance can vary dramatically between different companies, which is a defining characteristic of the current earnings season.
Nevertheless, he also noted that unlike some prior seasons where markets had rallied significantly ahead of reports, the S&P 500 has largely traded in a range since mid-May leading into this season. This suggests the market has not priced in excessive optimism prematurely, leaving some room for potential post-earnings moves.
Comments