Profits are moving U.S. equity prices more than at any time since the bull market began three and a half years ago. That market is rewarding investors for picking stocks based on company data instead of following the herd spooked by Europe's debt crisis and a slowing U.S. economy.
Since July, shares of S&P 500 companies have risen or fallen an average of 4.4% the day after financial results were released, according to data compiled by Bloomberg. The last time they moved more was in the second quarter of 2009.
Daily swings in the benchmark gauge narrowed to 0.4% last month, from 2.2% a year earlier, when economic and policy changes battered investors. More than 475 S&P 500 stocks moved in the same direction in six of the first nine days of August 2011, with all 500 down on Aug. 8.
According to bulls, there are fewer lockstep moves because investor behavior is changing. Investors are making choices based on results, along with analysts' projections that earnings at S&P 500 companies will rise almost 10% a year through 2014.
Meanwhile, bears argue that an earnings focus won't bring back individual investors who have abandoned equities for investments with less perceived risk. That group has drained more than $420 billion from U.S. equity mutual funds over the past four years, even though stocks have rallied 108% since March 2009.
“I'm not saying it's an easy job to be a stock picker in this environment, but it's certainly easier,” said Sandy Lincoln, chief market strategist at BMO Global Asset Management, which oversees about $100 billion in assets. “Stock selection does have the opportunity here to finally show a face with a smile.”
CALM MARKETS
Earnings have become increasingly important as concern about the eurozone crisis has eased in the wake of a pledge by European Central Bank president Mario Draghi to defend the euro. Other factors include the pullback of the S&P 500's 2012 gain amid evidence of a global economic slowdown.
Speaking to central bankers and economists at an annual forum in Jackson Hole, Wyo., Fed chairman Ben S. Bernanke said Aug. 31 that a new round of bond sales to stimulate the economy is an option, citing unemployment of more than 8% as a “grave concern.”
The S&P 500's 1.9% gain on Aug. 3 was the month's only daily swing of more than 1%, compared with nine such fluctuations in June, data compiled by Bloomberg show. Although markets calmed down, MetroPCS Communications Inc. (PCS), Western Digital Corp. (WDC) and eight other companies rose or fell more than 20% on the day after they reported earnings.WIRELESS CARRIER JUMPS
MetroPCS, a pay-as-you-go wireless carrier, posted a 76% earnings increase July 26 as it cut costs for sales and promotions amid a slowdown in new customers. The result exceeded estimates by the most since 2009, sending the stock up 37%.
Western Digital, a maker of disk drives and networking products, surged 21% after reporting profit July 25 that surpassed projections by 37%. Though the earnings figure was in line with the five-year average, the share price shift was three times as big as any since 2007.
Baker Hughes Inc. (BHI), the world's third-largest oilfield services provider, rallied 9.2% on July 20, when it said that improved results from North America beat analysts' estimates. The same day, the S&P 500 declined 1% after Spain said its recession will extend into next year and concern grew about its regional governments' finances.AMD, WELLPOINT
Earnings that trailed forecasts also exerted greater influence.
Advanced Micro Devices Inc. (AMD), the No. 2 maker of processors for personal computers, slumped 13% the day after income missed analysts' estimates for the first time since 2009. The move was more than twice the average price change.
Shares of WellPoint Inc. (WLP) slid 12% after the health plan provider reported profit short of projections, while a disappointing quarter for International Game Technology (IGT) led to a 20% drop in those shares.
“When some company breaks the monotony with a good or bad earnings report, you get an exaggerated reaction,” said Ben Fischer, a managing director at Allianz Global Investors, which oversees $366 billion in assets. “There's an event that you can get your teeth into, and then you get these huge reactions.”
