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US stocks have been swinging more than usual in response to recent corporate earnings reports, as a combination of high valuations and an uncertain outlook puts investors on edge.
Wall Street’s benchmark S&P 500 has been uncharacteristically calm in recent weeks, having gone more than a month without a daily move of 1 per cent in either direction. For many of its individual constituents, however, moves have been far more volatile.
Tesla, Philip Morris International and Netflix are among the large companies that enjoyed daily stock price gains of more than 10 per cent after reporting strong third-quarter earnings this month. Companies such as Lockheed Martin and HCA Healthcare suffered their sharpest drops in years.
“The severity of rewards and punishments on earnings is very high right now . . . you’re seeing 10 to 20 per cent moves, or higher,” said Heather Brilliant, chief executive of Diamond Hill, an asset manager that specialises in value investing. With valuations already stretched, she said, “If something underperforms a little bit, people think, ‘I don’t need it in my portfolio’”.
Stocks that missed earnings forecasts this reporting season underperformed the broader S&P 500 by an average of 3.3 percentage points on the day after their reports, according to Bank of America analysis based on data going up to the market close on Thursday. Historically, stocks that miss forecasts tend to underperform by a more modest 2.4 percentage points.
Missing forecasts tends to cause stronger share price reactions than exceeding them, because most large companies do their best to lay the groundwork ahead of results so analysts have realistic — but beatable — estimates. However, stocks that top expectations have also been rising higher than usual, outperforming the broader market by 2.7 percentage points compared with an average of 1.5 percentage points.
“Reactions were really pronounced in sectors like financials . . . that are not well-held by investors,” said Savita Subramanian, equity and quant strategist at BofA. “The positive surprises almost forced investors to get long.”
Investors and analysts suggested several reasons why the recent moves have been particularly strong.
Some are straightforward seasonal factors. David Giroux, head of investment strategy at T Rowe Price, who runs the firm’s $65bn Capital Appreciation Fund, said third-quarter earnings tend to provoke stronger reactions because it is a period when companies often provide more guidance on their medium-term outlook for the year ahead.
“There are a lot of companies that have given outlooks to 2025 that have been a little disappointing, and the market has come down really hard on them,” he said.
But the unusual market environment has also influenced investors, with indices trading at record highs despite geopolitical tensions, an uncertain interest rate outlook and an impending US election. The S&P 500 is trading at 21.7 times expected earnings over the next 12 months, compared with a five-year average of 19.6 times, according to FactSet.
“Right now for the market there are a lot of big catalysts occurring at the same time,” said Binky Chadha, chief global strategist at Deutsche Bank. “There is earnings, there’s the election, there’s geopolitical risks . . . given the multitude of catalysts, the market is kind of on edge, and a market on edge is going to react more in both directions.”
Chadha cautioned that with more than half of companies still to report results, the trend could change in the second half of earnings season, particularly once election-related uncertainty begins to fade.
In the meantime, investors are looking for opportunities during the volatility.
“All of this points to a real good old-fashioned stock picker’s market,” Subramanian said. “We’re in an environment where the approach is not just ‘buy megacap tech’, but really about looking for companies that are moving ahead and surprising to the upside.”
T Rowe’s Giroux added: “On one side of the coin, it’s frustrating when you see stocks go down more than they should for a near-term issue rather than a long-term issue. But on the other side, excess volatility in the marketplace tends to be an opportunity for investors who are paying attention, to take advantage of that volatility. If you like that stock over the next three to five years [and buy the dip], your expected return just went up.”
