Have investors grown numb to upside earnings surprises?

New numbers suggest beating analysts’ expectations isn’t going to save companies from punishment anymore

Have investors grown numb to upside earnings surprises?

Going beyond Wall Street’s earnings forecasts is apparently no longer impressive enough for a company to generate a rise in share prices.

Citing FactSet senior earnings analyst John Butters, Jason Zweig of the Wall Street Journal reported that so far this quarter, 161 companies in the S&P 500 that have announced better-than-expected earnings saw their stock prices get hammered afterward. Those include technology giants like Amazon, Alphabet, and Apple.

“To be fair, many major companies announced their latest quarterly earnings during October, when the S&P 500 lost 6.8%, its worst month since September 2011,” Zweig said. But with the index up almost 400% since March 2009, it could be getting harder to please investors. And five out of the six past quarters, according to Butters, companies that reported better earnings than analysts’ forecasts have generated lower stock returns than the historical average over the preceding five years.

Speaking to the Journal, James Bianco, president of Chicago-based Bianco Research, said that earnings reports from the previous quarter aren’t going to delight shareholders as much as before. Rather, they’ll be paying more attention to the surrounding outlook for the next quarter or next year.

For David Giroux, head of investment strategy at Baltimore-based T. Rowe Price, reactions to earnings announcements depend on two factors. First is whether the latest reported earnings are likely to be replicated or sustained, as opposed to being unusual or one-time events. “Underlying earnings quality was a bit worse this quarter,” he noted.

Second is the company management’s view on how robust business will be in the coming quarters. Many US companies are tempering expectations as the corporate tax cut fades further into the past, and rising rates and potential lower demand exports come over the horizon. “The underlying fundamentals are a little slower, and the market is adjusting by putting a lower multiple on late-cycle earnings,” Giroux said.

Another possible factor is that professional investors are not as beholden to sell-side analysts’ earnings forecasts as they were before, said Leigh Drogen, founder and CEO at earnings data firm Estimize. With big data on things like shipping statistics, website traffic, customer foot traffic, and credit-card volumes more available from other sources, they’re able to get a more real-time look at business activity.

Estimize crowd-sources earnings estimates from over 80,000 professional and amateur analysts. Sell-side analysts represent only around 5% of the contributors to Estimize. Approximately 20% are buy-side analysts at asset-management firms, about 15% are independent professionals, and around half are academics, individual investors, and other non-professionals.

Drogen claims that the forecasts aggregated from non-professionals are, on average, more spot-on than those of the pros. One possible explanation is that many non-professionals weigh in on companies they’ve got special focus and insight on.


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