We’re in the middle of earnings season, and it’s clear that investors who own stocks are not happy. Ever since JPMorgan Chase & Co. announced its quarterly results eleven trading days ago, the S&P 500 Index has gone down in nine of those days, with four of them seeing significant drops of more than 1%. Companies that didn’t meet both revenue and profit expectations have fared even worse, falling behind the S&P 500 by an average of 5.7% on the first day after their earnings reports. This is the worst performance in a year and the second worst since Bloomberg Intelligence started tracking this data in 2017.
These losses are happening because of several reasons. There’s uncertainty about the situation in the Middle East, questions about what the Federal Reserve will do with interest rates, and concerns about 10-year Treasury bond yields approaching 5%. When companies not only miss their quarterly targets but also have to deal with these bigger economic factors, the stock market tends to react negatively right away.
“Right now, the big picture of the overall economy is having a strong influence on the stock market, and when companies don’t meet their earnings expectations, the market is reacting more negatively than usual,” explained Rich Ross, who is the managing director and head of technical analysis at Evercore ISI. “In a broader sense, this reflects not only the uncertainty about the present moment but also concerns about what’s coming up in the next year.”
The lukewarm response to recent company earnings reports reflects the growing challenge for businesses to meet increasingly high expectations. This is happening as rising costs eat into their profits, and there’s uncertainty about the economic outlook for 2024.
It’s important to note that the results haven’t been terrible. In fact, 79% of the 200 or so companies that have reported their earnings so far have exceeded expectations, which is better than the long-term average. However, the major tech companies that many had hoped would boost investor confidence didn’t provide much of a boost. While the quarterly reports from other companies were decent, they weren’t outstanding.
The Nasdaq 100 Index has dropped by 2.6% this week, partly due to Alphabet Inc.’s disappointing cloud-related results, which outweighed the strong sales from Microsoft Corp. Meta Platforms Inc. also dashed hopes for a sustained recovery in advertising, and Tesla Inc. fell short of consensus estimates for profit, sales, and margins. On a positive note, Amazon.com Inc.’s strong results helped lift the Nasdaq 100 Index on Friday.
When it comes to the companies in the S&P 500 Information Technology Index (excluding Meta Platforms and Alphabet), their stocks have generally gone down by about 1.9% after they’ve reported their earnings. This is the second-worst reaction to earnings among all the different sectors, with health care being the worst, according to data collected by Bloomberg.
At the same time, the S&P 500 has experienced a 10% decline from its high point in July. This drop has caused the index’s 14-day relative strength index to fall to 29, which is below the 30 level that some technical analysts see as a sign that stocks have been sold off too much and may be oversold.
“While it remains uncertain whether stocks will respond favorably to earnings reports, it’s worth noting that the recent market downturn, driven by worries about bond yields, has left the market in an oversold condition marked by heightened pessimism,” explained Tim Hayes, the chief investment strategist at Ned Davis Research. “We’re beginning to see positive shifts in seasonal and cyclical factors, thanks to these oversold conditions and the prevailing sense of pessimism in the market.”
Looking ahead, next week is crucial as the earnings season continues. We’ll be keeping an eye on companies like Caterpillar Inc., which makes construction and mining equipment, and Advanced Micro Devices Inc., a chipmaker, as they reveal their earnings results.
