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Earnings season, traditionally a period when investors shift their focus to company-specific news and performance, has taken an unconventional turn this quarter. Rather than concentrating on corporate earnings, market dynamics are being influenced by a series of global events, leading to an unexpected degree of synchronization among S&P 500 constituents.
In the past few weeks since earnings reports began on October 13, four out of six trading sessions witnessed over 400 S&P 500 members moving in the same direction. This level of coherence has been a rare occurrence in comparison to the previous three earnings seasons.
For active stock pickers, this poses an added challenge in a year where their success rate has been limited. Data compiled by Bank of America Corp. reveals that only 37% of large-cap active managers outperformed their benchmarks by the end of September.
“The macro is dominating the narrative again,” notes Quincy Krosby, Chief Global Strategist at LPL Financial. “The situation in the Middle East is undoubtedly impacting market sentiment.”
This situation is compounded by 10-year Treasury yields reaching levels not seen since 2007 and the looming threat of a US government shutdown next month. Combined, these factors make the lives of active stock pickers notably more difficult.
The third-quarter earnings season has had a mixed start, with most banks performing well, but notable exceptions like Tesla Inc., one of the S&P 500’s strongest performers this year, falling short of expectations.
Distinguishing winners from losers immediately following earnings announcements has proven to be challenging. For example, on one day, 92% of S&P 500 members saw gains, and on three separate occasions since October 13, at least 82% of stocks moved in the same direction.
Investors are closely eyeing next week when Big Tech giants report their earnings to assess whether Wall Street’s projections may have been overly optimistic. Companies that miss expectations have faced repercussions, with the market punishing them.
Earnings season data shows that S&P 500 companies that beat earnings per share and sales projections underperformed the benchmark by an average of 0.1% within a day of reporting, which is well below the six-year historical average. Meanwhile, those that fell short trailed by 6.2%, marking the most significant negative reaction in a year.
This pattern suggests that while company-specific negative news might not have been fully factored into particular stocks, macro-driven factors are increasingly guiding the direction of US equities, as evidenced by the muted reaction to positive earnings surprises.
The all-or-nothing days, reminiscent of the stock market turbulence in 2022, have regained prominence since the outbreak of conflict in the Middle East and have been resurfacing since mid-September. Headwinds are mounting, from the prospect of additional Federal Reserve interest-rate hikes to the political landscape in the US House of Representatives, driving the recent rise in co-movements among stocks.
This divergence from the usual earnings season behavior is becoming more apparent. During typical earnings seasons, stocks tend to react primarily to company-specific developments. However, as the landscape becomes more complex, with several macro factors at play, correlations among stocks are on the rise once again.
In the days ahead, especially as major tech firms prepare to release their results, it is anticipated that the focus will return to company-level fundamentals. Citigroup Inc.’s Stuart Kaiser points out that positive Wall Street revisions to profit outlooks for companies like Apple Inc. and Microsoft Corp. over the past month are indicative of strong fundamentals within the sector, despite the global concerns.
“While macro concerns related to higher Treasury yields persist, we believe the focus on company-level fundamentals will take center stage in the near-term, driving down realized correlations,” says Kaiser, Citigroup’s Head of US Equity Trading Strategy.
