US stocks belie upbeat corporate earnings season

A tough summer for US stocks is overshadowing Corporate America’s best-received earnings season in years.

Despite big selloffs for the likes of Tesla Inc. and Amazon.com Inc., the median reaction for S&P 500 firms that beat profit estimates outperformed the benchmark by 1.7% on the day of reporting results — the widest margin in Bloomberg Intelligence’s records going back to 2019 — while the median reaction for stocks missing forecasts trailed the index by just 1.1%, one of the narrowest margins over the same period.

So while the S&P 500 is down more than 7% since JPMorgan Chase & Co. reported its results on July 12, the unofficial start to the quarterly earnings season, the market is also rewarding individual companies that are delivering on their promises.

The trends are in response to the strongest profit growth for US firms in over three years in absolute terms. Already facing a high bar coming into the reporting season, S&P 500 firms have still managed to beat expectations overall with a 13% leap in second-quarter profits. That’s the sharpest increase since the fourth quarter of 2021, BI data show. And it has helped alleviate concerns of softening consumer demand and weaker pricing power due to cooling inflation.

CAN'T COMPLAIN

“There’s been little to complain about with respect to the S&P 500’s earnings,” said Gina Martin Adams, BI’s chief equity strategist. “Though revenue misses have been more frequent than usual, guidance momentum is now positive,” she wrote in a note on Monday entitled Stop Blaming Earnings for S&P Struggles.

Among some of the most notable rallies this season, DoorDash Inc. surged 8.4% on Friday after posting results that analysts deemed “stellar” at a time of “meltdown” in the quick-service restaurant industry. Barbie maker Mattel Inc. jumped 10% on July 24 because of its impressive margins, while BNY Mellon Corp. hit a record high on July 12 following its estimate-beating earnings report.

Still, the S&P 500 at an index level has reaped no rewards from this strong season. Instead, the stock market is fixated on worries about excessive valuations in high-flying technology companies stoked by an artificial intelligence frenzy and concerns that the Federal Reserve hasn’t cut interest rates fast enough to stave off an economic downturn.

With the share of companies beating sales estimates also the weakest since 2019, Wall Street pros are wondering how much longer profit margins will remain resilient. Firms that disappoint on margins or forecasts are seeing their stocks punished: Tesla sank 12% on July 24 following its margin miss, while Super Micro Computer Inc. tanked 20% and Airbnb Inc. slumped 13% on Wednesday after their disappointments.

But for the most part, investors are being more forgiving than usual with stocks that miss estimates. For example, GE HealthCare Technologies Inc. shares rallied 2.4% following an outlook cut that analysts said was largely expected. And Kraft Heinz Co. jumped 4.1% after slashing its annual organic sales target because investors were relieved that it wasn’t projecting an even bigger decline.

RESILIENT OUTLOOK

Despite broader concerns about an economic contraction, Citigroup Inc. strategist Scott Chronert said his outlook for earnings this year hasn’t changed.

“We remain comfortable with our S&P 500 earnings projections, while acknowledging some risk should a traditional recession ensue,” Chronert said. He added that the team’s models show “a high likelihood” of roughly 10% profit growth in 2024 — with a further increase next year.

Analysts currently expect earnings to rise 8.5% in 2024 and 14.2% in 2025, according to data compiled by BI.

The effusiveness from Corporate America this quarter was notably absent from Europe, where the median stock in the Stoxx 600 Index that missed profit estimates underperformed the benchmark by 2.2%, the widest margin since at least 2016, figures from JPMorgan show. On the flip-side, stocks reporting better-than-expected earnings outperformed by only 1.6%.

“The US investor is highly optimistic whereas the European investor tends to be relatively pessimistic,” said Chris Hart, portfolio manager at Boston Partners. “But then you’re paying a much higher multiple for that. Over the medium term, the pendulum starts to swing back to Europe, where you get to a point where valuations are very compelling.”

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