The Market Is Battering Some Stocks After Earnings, Time To Invest?

The U.S. companies have fared surprisingly well this year despite concerns about delayed rate cuts amid stickier-than-expected inflation rates and surmounting geopolitical tensions. Despite the volatile market backdrop, the top 500 companies in the U.S., in terms of market capitalization, have beat analyst estimates to deliver expectations. 

Earnings season is typically a time of celebration or reckoning for companies and investors alike. In the earnings season for the second quarter of 2024, 79% of S&P 500 companies that published their quarterly financials reported a positive EPS surprise, while 60% of the companies in the benchmark index issued a positive revenue surprise. 

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A beat on earnings expectations often leads to a stock rally, while a miss can result in a sharp sell-off. However, investors have displayed muted enthusiasm for companies beating consensus estimates during the Q2 2024 earnings season. 

Mixed Earnings Performance and Market Reaction 

As of Aug. 16, 93% of companies in the S&P 500 have reported their earnings for Q2 2024. Of these, 79% have posted earnings per share that exceeded analysts' expectations. This is slightly above the 5-year average of 77% and the 10-year average of 74%. 

Despite the high percentage of companies beating estimates, the magnitude of these earnings surprises has been underwhelming. On average, earnings have surpassed estimates by just 3.5%, well below the 5-year average of 8.6% and the 10-year average of 6.8%.

The market's reaction to these earnings surprises has been telling. According to a report published by FactSet, S&P 500 companies that reported positive earnings surprises saw their stock prices rise by an average of just 0.8% in the two days before and after their earnings release. This is below the 5-year average of a 1.0% increase for companies reporting positive surprises. 

For instance, Amazon.com AMZN, a tech stalwart and Magnificent Seven stock, delivered a strong earnings beat, as its GAAP EPS amounted to $1.26 in the second quarter of 2024, higher than the consensus estimate of $1.03. Yet, despite this positive surprise, Amazon's stock price plummeted by 11.4% between July 30 and August 5. Over the past month, Amazon's shares have declined by nearly 2.5%. 

Conversely, companies that missed earnings expectations saw their shares decline faster than the five-year average. Stocks of companies that reported negative earnings surprises declined by an average of 3.8% in the two days before and after their earnings release, significantly worse than the 5-year average decline of 2.3%. 

Ford Motor Company F, for instance, saw its shares plummet by over 20% between July 22 and July 26 after reporting its second-quarter earnings results. The company's Q2 EPS came in at $0.47, falling short of the $0.64 Wall Street estimate. 

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Companies Feeling the Pinch 

The percentage of companies issuing negative EPS guidance for Q3 2024 is below average, at 55%, compared to the 5-year average of 59% and the 10-year average of 63%. Additionally, analysts' revisions to Q3 earnings estimates aligned with historical norms, decreasing by 1.8% during July, which matches the 5-year, 10-year, and 20-year averages.

Equities Rally

As U.S. equities recover from the carry trade rout earlier this month, the S&P 500 index and tech-focused Nasdaq composite index logged less than 1% gains during the Aug. 19 trading session. This marks the first consecutive eight-day gains for major indexes, and it is the first time both the S&P 500 and Nasdaq 100 have witnessed such a rally so far in 2024. 

"While we do remain generally bullish, we don't see a straight line up in the market," said Greg Marcus, Managing Director at UBS Private Wealth. "The economy is slowing, and there will likely be a mix of conflicting economic data points over the coming months, which is set to continue this recessionary debate."

Interestingly, the topic of elections has gained significant traction this earnings season. A staggering 116 S&P 500 companies discussed “elections” during their Q2 2024 earnings calls, a sharp rise from the 65 companies that did so in Q2 2020. 

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