(Bloomberg) – In a week when just a few words from Jerome Powell and Donald Trump were enough to send shares, it's easy to conclude that their statements are important to the markets right now. But something else shows that prices can fluctuate: poor earnings.
Among S&P 500 companies that reported second-quarter results, those who have longed for analysts have estimated that their stock is lagging behind the market by 3 percentage points the day after, data collected by Goldman Sachs showed. Meanwhile, the rates were rewarded with gains of 1.43 percentage points. The spread, more than 4 points, was the third largest since 2012.
The deviation in performance shows that even in an environment where macro problems seem to dominate, getting stock options right still has consequences. Revenues have not lost the ability to move markets – something else to worry about when companies release forecasts at the fastest rate in four years.
"Investors are concerned, they are anxious, they are looking for reasons to sell," Chris Gaffney, president of TIAA Bank's World Markets, said by phone. Earnings expectations have been lowered. When you miss lowered expectations, you will be punished. "
It's a message that is easily lost if all you do is stare at the surface of the market. Broadly, socks have been linked to every turn of monetary and trade policy. The S&P 500 fell after the Fed chairman Powell called Wednesday's interest rate cut a "mid-cycle adjustment," hoping for complete relief, dropping again after Donald Trump said he would introduce new Chinese tariff rates and just laid out the worst week of the year.
Mid in all the hassle, it would be easy to overlook the importance of earnings aside, but stock reactions to individual announcements show that the market is becoming less forgiving at company level.
Even after During the rich week's fall, the S&P 500 is up 17% this year despite no earnings growth to speak of, while the valuation has expanded at the fastest pace of ten years. At an expected earnings of 16.7 times, the index traded at a premium of 11% to the average of 10 years.
Some of the optimism is linked to expectations that companies will grow to almost 6% in the fourth quarter and then 10% for the full year 2020, data compiled by Bloomberg shows.
The expected acceleration rate is too optimistic, according to strategists at Citigroup and Goldman Sachs. Both companies are forecasting an increase of no more than 6% for next year.
Trump's planned 10% tariff on another $ 300 billion of Chinese goods would trim the S&P 500's profit growth by 60 to 70 basis points as entry costs increase and corporate confidence is weakened, according to a Bank of America estimate.
Companies are lowering guidance. Among those who provided forecasts for the third quarter, more than half were below analysts' estimates, the worst since 2015, data compiled by Bloomberg shows.
The combination of high valuations and deteriorating earnings can be a problem for equities, according to Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management, which has about $ 253 billion under management.
"There are stocks that have come over the skis," he said. "When that air pocket is facing reality, you have a look back."
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