Stock Market Vigilantes Lessen Punishments for Earnings Misses

Investors will be closely watching earnings next week from Apple, Amazon, and Microsoft for clues about whether Wall Street's projections are too optimistic in light of the cooling US economy.

Although there are increasing signs of a slowdown, there is a silver lining: companies that exceed expectations are being rewarded by the stock market, while those that fall short are not being punished as harshly. This suggests that a lot of bad news has already been priced in.

The S&P 500 has advanced by 2.4% since earnings season began two weeks ago. Although the number of companies that have beat earnings estimates is lagging early in the cycle, data compiled by Societe Generale shows that the overall index is still making gains.

According to data compiled by Bloomberg Intelligence, companies in the S&P 500 that have exceeded projections on both earnings per share and sales have outperformed the S&P 500 by an average of 1.45% within a day of reporting. This is a significant increase from the norm of the past six years. Additionally, those companies that fell short of projections underperformed the broader market by just 1.7%. This is the least negative reaction in eight quarters, as many companies are taking steps to adjust to shifting business conditions.

"Many companies have announced restructuring efforts and cost-cutting plans in response to slowing economic growth, which has helped boost investor confidence," said Wendy Soong, a senior associate analyst at Bloomberg Intelligence. "As a result, we've seen more upward movement in stock prices than we have in the past."

Stocks surged today, with those that beat on fourth-quarter earnings and sales outperforming the broader market.

The reports next week from the megacap tech companies come after disappointing outlooks from Microsoft Corp. and Intel Corp. this week. On Friday, Intel's stock fell more than 7% after the company forecast one of the worst quarters in history. This drag on other chip stocks. However, Microsoft’s warning of a sales slowdown had far less impact on the company’s stock, which is poised to finish the week higher despite the outlook.

So far this earnings season, the companies that have seen the biggest post-report gains have included SVB Financial Group (the parent company of Silicon Valley Bank) and Lamb Weston Holdings Inc. (a US food processing company). On the other end of the spectrum, financial services firm Northern Trust Corp. and investment bank Goldman Sachs Group Inc. have seen the biggest drops.

Overall, traders who bought single-stock call options five days ahead of an earnings release this reporting season have seen a 29% average return on premium, or the amount paid for the option, data compiled by Goldman Sachs show. This is one of the best runs in years and underscores the more bullish atmosphere.

The results of next week's Federal Reserve interest rate decision will coincide with the central bank's first rate hike of the year. While the Fed is widely expected to deliver a quarter-point rate hike, investors are looking for signals that it will soon stop tightening monetary policy. Speculation about such a pause has fueled outsized gains this year for growth stocks, whose valuations are more sensitive to changes in interest rates.

So far, US companies are slightly outperforming earnings estimates for the fourth quarter of 2022. About 72% of firms have posted better-than-expected earnings, up from 70% in the third quarter but down from 76% a year earlier, according to data from Bloomberg Intelligence. This suggests that Wall Street's projections were relatively pessimistic for the final three months of the year.

Investors are hoping that the Fed will raise interest rates at its upcoming meeting, with markets anticipating that it could be the final rate hike of this cycle, said Scott Colyer, chief executive at Advisors Asset Management. However, the next batch of tech earnings could change the current market environment depending on what management teams say about their outlooks, while any pause in rate hikes from the Fed may not come until later this year.

The percentage of companies that beat, missed or matched analyst EPS expectations.

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The following is a breakdown of the members who have reported and how they did:

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