Richly valued U.S. stocks are leaving investors with little tolerance for disappointment, raising the stakes ahead of a week in which two more tech and growth giants are scheduled to report results.
Strong reports from Microsoft and Alphabet, Google’s parent company, on Thursday helped propel the S&P 500 to its biggest weekly gain since early November, following its first 5% decline of the year. The S&P 500 is up about 7% in 2024 and about 24% since the end of October.
But investors punished Meta Platforms’ disappointing forecasts. Shares of Facebook’s parent company fell more than 10% on Thursday following the release of its report. A sales warning sent shares of industrial company Caterpillar down 7%.
More broadly, S&P 500 companies that beat analysts’ earnings estimates this quarter saw their stocks outperform by a median of just 0.2%, JPMorgan strategists said. In contrast, stocks of companies that missed earnings estimates lagged a median of 4%, representing the biggest underperformance for companies that missed estimates in at least eight years.
Earnings reports have been “pretty good,” said Rick Meckler, a partner at Cherry Lane Investments. But “everyone who missed out in one way or another pays a pretty high price.”
More results are expected over the next week from the “Magnificent Seven” group, which drove markets higher last year. Amazon publishes its results on Tuesday and Apple on Thursday. On Wednesday, the Federal Reserve will release its latest monetary policy statement following its two-day meeting.
Some believe that the almost uninterrupted rise in markets over the past six months has made investors less forgiving of earnings declines. The S&P 500 trades at 20 times forward earnings, well above its historical average of 15.7, according to LSEG Datastream.
“We cautioned that potential better-than-expected results may not drive stocks higher during earnings season, given the stocks’ already strong run ahead of earnings season and strong positioning tense…,” JPMorgan strategists said. “Indeed, stock price reactions in the United States (have) been disappointing so far.
Tesla shares jumped 12% earlier this week after the company said it would introduce new models by early 2025. Some investors attributed the rise to bargain hunting after a slump painful this year, which lowered the bar for good news. Tesla shares remain down more than 30% for the year.
Rising Treasury yields could be another factor. Companies’ projected future earnings are more heavily discounted in analysts’ models when bond yields rise, because investors can now get a higher return on government debt without risk. The benchmark 10-year Treasury bond yield rose to 4.74% this week, its highest level since early November, following new evidence of stronger-than-expected inflation.
Overall, however, 78% of S&P 500 companies beat analysts’ estimates for the first quarter, with profits up 5.6% from a year earlier, LSEG IBES said Friday.
According to Chuck Carlson, managing director of Horizon Investment Services, strong corporate earnings have become more important as rising Treasury yields and persistent inflation have increased uncertainty about actions.
Corporate profits “are at a level that can support the market and kind of overcome the volatility of inflation and the interest rate environment,” Mr. Carlson said.
Profits could take a back seat if bond yields continue to rise or inflation data remains higher than expected. Although investors do not expect the Fed to take action on interest rates at next week’s meeting, they will be listening for comments from the central bank on recent evidence of inflation higher than expected.
Expectations for interest rate cuts, which had been a key driver of the rise, faded following signs of strength in the economy and sustained inflation. Futures markets showed Friday that investors expected just 35 basis points of rate cuts for 2024, down from more than 150 basis points in January.
Earnings have been positive, but what the market is most concerned about is inflation and what the Fed is going to do about it,” said Scott Wren, senior global market strategist at the Investment Institute Wells Fargo (Reporting by Lewis Krauskopf; Writing by Ira Iosebashvili and David Gregorio)
