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U.S. stocks have been more volatile than usual following recent corporate earnings reports, as the combination of high valuations and an uncertain outlook has worried investors.
Wall Street’s benchmark S&P 500 index has been unusually calm in recent weeks, after more than a month without a daily move of 1% in either direction. However, for many of its individual components, the moves are more volatile.
TeslaPhilip Morris International and Netflix was among major companies with daily share price increases of more than 10% after reporting strong third-quarter earnings this month. Companies like Lockheed Martin and HCA Healthcare suffered their sharpest declines in years.
“The severity of rewards and penalties on earnings is very high today. . . you are seeing volatility of 10 to 20% or higher,” said Heather Brilliant, chief executive officer of Diamond Hill, an asset manager specializing in value investing. With valuations already stretched, she said, “If something performs a little bit worse, people will think, ‘I don’t need that in my portfolio.’”
Share Earnings forecast misses this reporting season have underperformed the S&P 500 as a whole, on average by 3, according to Bank of America analysis based on Thursday’s market close. 3 percentage points the day after their report. Historically, unpredicted stocks tend to underperform by a more modest 2.4 percentage points.
Missing forecasts tends to cause a stronger reaction in stock prices than exceeding them, because most large companies do their best to lay the foundation in advance of results so that analysts can realistically estimated – but beatable. However, the top stocks were also higher than usual, outperforming the broader market by 2.7 percentage points versus an average of 1.5 percentage points.
“The response has been really pronounced in sectors like finance. . . said Savita Subramanian, equity and quantitative strategist at BofA. “Positive surprises almost force investors to buy.”
Investors and analysts have offered a number of reasons why the recent moves have been particularly strong.
Some are simple seasonal factors. David Giroux, head of investment strategy at T Rowe Price, who runs the firm’s $65 billion Capital Appreciation Fund, said third-quarter earnings tend to trigger a stronger reaction because it is companies typically provide more guidance on their medium-term outlook. next year.
“There are a lot of companies whose outlooks to 2025 are a little disappointing and the market has gone down really hard on them,” he said.
But the unusual market environment also affected investors, as indexes traded flat high record despite geopolitical tensions, an uncertain interest rate outlook and the upcoming US election. According to FactSet, the S&P 500 is trading at 21.7 times expected earnings over the next 12 months, compared with the five-year average of 19.6 times.
“The market has a lot of big catalysts happening at the same time,” said Binky Chadha, chief global strategist at Deutsche Bank. “There are incomes, there are elections, there are geopolitical risks. . . With a multitude of catalysts, the market is almost at risk, and markets at risk will react more in both directions.”
Chadha warned that with more than half of companies still reporting results, this trend could change in the second half of earnings season, especially as election-related uncertainty begins to ease.
Meanwhile, investors are looking for opportunities during volatile times.
“All of this shows that the market for old-fashioned stock pickers is really good,” Subramanian said. “We’re in an environment where the approach isn’t just ‘buy large-cap tech’ but is really about looking for companies that are moving forward and surprising in terms of growth.”
T Rowe’s Giroux added: “On the one hand, it’s frustrating when you see stocks falling more than they should because of a short-term problem rather than a long-term problem. But on the other hand, excessive volatility in the market tends to become 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 increased.”
