Despite a strong performance in the second quarter of 2021, U.S. companies are not reaping the benefits on the stock market. An impressive 79.7% of S&P 500 companies have surpassed Wall Street’s profit expectations for the quarter, marking the highest “beat” rate since 2021. However, this positive outcome has failed to translate into significant gains for their shares.
According to equity analysts at Morgan Stanley, investors’ response to the better-than-expected profit numbers has been lackluster. In fact, stocks’ gains within one day of reporting earnings have been trending below the historical average. The average post-earnings move for S&P 500 companies this year has been -0.8%.
Additionally, the percentage of S&P 500 stocks rising after reporting earnings has reached a low point, with only 42% experiencing an upward trajectory. This figure represents the lowest level seen since the beginning of 2021.
The subdued market reactions suggest that despite outperforming expectations, companies are not being rewarded by investors. It remains to be seen what factors may be influencing this discrepancy between profit performance and stock market response.
Busy Week for Earnings Reports
This week is poised to be the busiest week of the second-quarter 2023 earnings reporting season, with over 170 S&P 500 companies scheduled to release their earnings before the end of the week. Notably, Apple Inc. and Amazon.com Inc., two prominent members of the Magnificent Seven group of technology stocks, will be announcing their earnings late Thursday.
Despite some positive results, analysts have identified a few factors contributing to the underwhelming market response. Firstly, despite beating expectations, S&P 500 companies are projected to experience a 7% decline in earnings compared to the second quarter of 2022. Additionally, the magnitude of these earnings beats has been relatively smaller than in previous years.
The U.S. stock market has seen significant gains since the beginning of 2023, with the S&P 500 rising by 17.5% and the Nasdaq Composite climbing by an impressive 33.5% as of Wednesday’s closing. Analysts suggest that these considerable gains have set a high bar, making it challenging for companies to surpass expectations this earnings season. Nadia Lovell, a senior U.S. equity analyst at UBS Global Wealth Management, emphasized this point during an interview at the start of earnings season.
It is worth noting that U.S. stocks experienced a decline on Wednesday, with the S&P 500 dropping by 1.4% to 4,513.39, marking its first decline of over 1% since May 23, according to data from FactSet. Furthermore, the Nasdaq Composite fell by 2.2% to 13,973.45, while the Dow Jones Industrial Average experienced a decline of approximately 350 points or 1% to reach 35,282.52.
For further insights and analysis, you may want to read: U.S. stocks typically rally during earnings season. Here’s why this summer might be different.