Even as stocks rebounded from their bear market lows, there were persistent concerns.
The concern is inflation and a slowdown in the economy will lead to weaker earnings reports and push the market back.
In fact, companies haven’t outperformed analyst expectations for earnings by a record margin as they have in 2021.
Nevertheless, investors are rewarding companies that simply met expectations or outperformed by a larger margin than in any earnings season in the last two years.
Interactive Brokers Chief Strategist Steve Sosnick said:
“We tended to think maybe a little bit negatively. There was some concern about the kitchen sink quarter,” he said, suggesting that companies could use second-quarter earnings to get all the bad news to the market at once. He mentioned investors’ fears that they would throw it out to the public.
Instead, as of Aug. 3, about 51% of the 854 U.S.-listed companies covered by Morningstar analysts who reported second-quarter results had investors do what they did during first-quarter earnings. Couldn’t punish stocks to the same degree. The average daily return after the announcement of positive results is 1.89%, compared to an average of 0.75% over the last four quarters. See the discussion at the end of this article for a full explanation of how the data is calculated.
Other Key Takeaways from Second Quarter Earnings
- Shares of companies that missed expectations actually rose 0.72% on average, compared to an average loss of 1.77% for the same group in the previous year.
- Management appeared confident in its guidance and commentary, and investors also sent shares higher, which fell short of earnings expectations.
- Of the stocks reported by Morningstar analysts, only eight stocks fell more than 10% after their earnings were announced, compared with 32 stocks that ended the first quarter. Hardest hit was the reinsurer’s Scor (scree), down 15%.
- No company we’ve ever reported has lost more than 20% in stock price. Seven companies, including Under Armor, fell that much last quarter (UA) stock plunged 25.88%.
- Shares of the big retailers whose earnings have reacted the worst to Q1 results are yet to report, and investor sentiment could sour quickly.
So far, few companies have actually beaten their earnings expectations in the second quarter, with only 47% reporting so. That’s down from 56% in Q1 and below the 60% average for the last four earnings seasons. The number of companies that failed to meet expectations has also increased, with approximately 19% of companies missing out on Q2 quotes. This is slightly worse than Q1’s 18% compared to the 15% average over the past year.
So why are investors cheering for Q2 news?
“Better than feared was key to the quarter,” says Sosnick, pointing to shifts in market sentiment.
When market sentiment is good, investors expect companies to outperform and typically reward profits, and vice versa, he said. But if, as Sosnick sees it now, market sentiment “stinks”, “markets just want companies to hit their targets. ,” he says.
This represents 33% of companies reporting so far, as more companies met expectations in the second quarter. The average revenue response rate for companies that met expectations fell by 0.57%, slightly above the average decline of 0.74% over the previous year.
When it comes to companies that disappoint and still have a good average earnings response, it suggests that investors were paying attention to more than just winning or losing. Sosnick found himself feeling more confident about how companies talk about targets in their second-quarter earnings callouts.
“The company lacked clarity, and that was evident in the first quarter, which is why investors had half the glass empty in the second quarter,” he says. “Instead, companies seemed a little more confident, if not optimistic, in their guidance. Markets like certainty.”
Even if the pace of gains hasn’t beaten expectations this quarter, the combination of companies generally meeting expectations and growing confidence in guidance ranges was enough to turn market sentiment around.
“Investors were much more willing to reward positive news than punish negative news,” says Sosnick. He cited investor reaction to bank earnings, which many see as a precursor to the rest of the earnings.
The broad market rose 13.9% from its 52-week low on June 16th. This was bolstered by solid earnings news, which some believe the market has broken above the bear market lows. But Sosnick doesn’t say recent results indicate the market is on the rise.
“We’ve made it through most of the earnings season, but we’re hearing from retailers over the next few weeks, so I suspect they’ll tell a different story,” he said.
Big waves of retailers are usually reported towards the end of the earnings season. Many of them were among the worst earning companies in the first quarter earnings including Target (target), its share fell by 24.93%, and Bed Bath and Beyond (bbee), down 23.58%.
Sosnick is also wary of another reversal in market sentiment, saying there are still factors that could change sentiment.
“I’m a big believer in ‘don’t fight the Fed’ and the Fed hasn’t taken its foot off the brakes yet, so I wouldn’t say the bear market has hit a low,” he said. He cites expectations that the Federal Reserve will continue to raise interest rates.
“There’s also the other issue of the Fed shrinking its balance sheet. The Fed is shrinking its balance sheet at a very slow pace, which Sosnick sees as a major headwind going forward.
“they [the Fed] Unless we face a recession, they are unlikely to change their stance and the bond market is screaming in our faces that we are likely to face it. expect the Fed to cut rates and either ignore it or think it’s fine. [in the event of a recession]’ says Sosnick. “It’s a very important case of paying attention to what you want.”
The analysis was conducted on 854 U.S. listed stocks covered by Morningstar analysts as of August 3, 2022. Earnings release dates range from April 1, 2020 (start of the second quarter 2020 earnings season) to August 3, 2022.
Earnings response is the one-day return of a company’s stock on the next available trading day after the company’s earnings release date. If a company announced earnings before the market or while the market was open, earnings were calculated on that same day. If a company announced earnings after the market closed or over the weekend, the next trading day was used to draw his one-day return as a reaction to earnings.
The data was aggregated based on a surprise percentage of the company’s earnings per share results. If a company reported that his actual EPS was 5% or more above FactSet’s average consensus estimate, it was considered a beat. If a company reported actual EPS 5% below or below the estimate, it was considered a mistake. Results were considered concordant if the actual EPS was within 5% of the estimate.
Revenue mistakes are getting more passes
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