Earnings Season Unleashes Challenges as Companies Face Market Penalties for Missed Estimates
Oct 30, 2023
The past week witnessed mixed results in the financial markets, as the S&P 500 experienced a 0.5% drop, while the Nasdaq Composite managed a 0.4% gain. These divergent outcomes marked the end of a turbulent week, characterized by broad-based losses. Over the week, both the Nasdaq and S&P 500 recorded declines of 2.6% and 2.5%, respectively. Nonetheless, despite the weekly setbacks, the overall performance for the year remained positive, with the S&P 500 up by 7% and the Nasdaq showing a substantial gain of 21%.
The week ahead promises an abundance of macroeconomic and microeconomic data. Around 30% of S&P 500 companies were set to report their earnings, with prominent players that include Advanced Micro Devices (AMD), Apple (AAPL), Starbucks (SBUX), and Qualcomm (QCOM) taking the stage. The week is also poised to deliver the latest figures on job openings, an eagerly anticipated decision on interest rates from the Federal Reserve Open Market Committee (FOMC), and the release of the October employment report. In other words, it’s a week packed with significant events, further intensified by geopolitical tensions and the looming specter of a government shutdown, potentially setting the stage for heightened market volatility.
A notable trend emerged in this quarter's earnings cycle, emphasizing the challenging landscape companies were navigating, regardless of whether they surpassed or missed earnings estimates. Companies in the S&P 500 that fell short of earnings expectations experienced a harsher market response, with an average decline of 5.5%. This marked a stark departure from the five-year average of 2.3%, indicating companies missing earnings estimates were being penalized roughly twice as severely as in recent history. Even companies reporting positive surprises faced headwinds, as their shares dropped by 1% in the two-day period before and after their earnings announcements.
This unforgiving nature of the current earnings season contrasted with analysts' expectations that S&P 500 profits would increase by 2.7%, as reported by FactSet. The market has shifted discernably from earlier this year when it was characterized by optimism and substantial gains. Now, there’s a climate of caution and skepticism. The persistent issue of inflation contributed significantly to the change.
The recent report on personal consumption expenditures (PCE) revealed a 3.7% year-over-year increase in prices, aligning with expectations and reinforcing the Federal Reserve's decision to maintain the status quo. According to the Chicago Mercantile Exchange (CME), there was a 98% probability of unchanged interest rates at the November meeting and a 74% chance of rates remaining unchanged at the final meeting of the year in December. However, the 3% inflation rate remained above the Fed's 2% target, underscoring the inflationary challenges faced by the economy.
Besides earnings, the Fed decisions and the economic reports, several other market indicators demand attention, including bonds, oil and gold. Yields on the benchmark ten-year Treasury note briefly flirted with the 5% mark before retreating. The 5% threshold was of psychological significance for traders, warranting vigilant monitoring. Oil prices were down nearly 2% in premarket trading, hovering just below $84 per barrel. Over the last month, oil exhibited a trading range between $80 and $92 per barrel. Furthermore, gold's price surpassed the $2,000 mark, reflecting a 10% increase for the year, driven by concerns surrounding inflation.
The week's quieter start, particularly today, was expected to be followed by an acceleration in the cadence of earnings releases and economic reports. The upcoming abundance of potentially turbulent developments could result in volatile trading conditions. As a precaution, prudent risk management strategies, such as trading with smaller positions, were recommended to navigate periods of market uncertainty. The advice remained consistent: Adhere to your investment strategy and maintain focus on long-term plans.
JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan
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