Earnings Season Sees Increased Stock Volatility Amid High Expectations
- According to FactSet, the stock market is exhibiting strong reactions to earnings surprises, with positive surprises receiving less favorable rewards and negative ones facing harsher penalties.
- This trend indicates a heightened sensitivity in investor sentiment towards earnings performance.
- Investors seem to be adjusting their strategies based on these earnings reports, leading to significant movements in stock prices.
In the second quarter of 2024, companies reporting earnings have faced significant market reactions, with stocks experiencing an average decline of 3.8% following disappointing results. This figure, reported by FactSet, marks a notable increase from the five-year average decline of 2.3% during similar periods. The heightened volatility reflects the market's current climate, characterized by elevated expectations and concerns over an overheated stock market. The tech-led rally that has dominated the market this year is beginning to extend to small-cap and cyclical stocks, as investors shift their focus away from previously successful megacap companies. However, the earnings season has revealed a trend where stocks that miss earnings expectations are being penalized more severely than in the past. Peter Boockvar, chief investment officer at Bleakley Financial Group, noted that some stocks have already rallied significantly, creating a high bar for performance that is difficult to meet. Notably, even companies that exceed earnings expectations are not guaranteed positive stock reactions. For instance, shares of JPMorgan Chase fell 1% despite reporting a 52% increase in investment banking fees and surpassing profit and revenue forecasts. This trend suggests a disconnect between earnings performance and stock market reactions, as highlighted by portfolio manager John Belton, who pointed to a prevailing risk-off mentality among investors. As the earnings season progresses, the market continues to navigate a complex landscape of investor sentiment and performance expectations, indicating potential for further volatility.