BANK OF AMERICA: Companies are crushing earnings season so far — but the firms missing forecasts are being punished more than usual

Reuters
  • Third-quarter earnings season is a couple weeks underway, and Bank of America Merrill Lynch analysts found that companies that missed sales and profit expectations are getting hit more than usual in next-day trading.
  • The companies that fell short of expectations for revenue and earnings underperformed the S&P 500 by 3.9 percentage points, the analysts found, compared to the 2.4 percentage point historical average.
  • The worse-than-usual performance by such companies suggests investors may not be confident enough in long-term outlooks to forgive third-quarter performance, Bank of America said.
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Third-quarter earnings season is underway, and the performance of 75 S&P 500 companies to already report brings fresh insight into investors’ economic outlook.

Of the companies to report, 43% have beaten analyst expectations for both revenue and earnings, according to Bank of America Merrill Lynch analysts. The figure lands slightly above the second-quarter average of 41% and the year-ago average of 40%.

Yet the companies that missed analyst estimates in both categories were clobbered more than usual in public trading, underperforming the S&P 500 by 3.9 percentage points in next-day trading, the analysts found. Historically, companies underperform the index by 2.4 percentage points when they miss sales and earnings estimates.

Read more: Goldman Sachs says these 5 trades can help investors make a killing during a crucial earnings season

The companies beating both estimates outperformed the index by 1.6 percentage points, falling in line with the historical average.

The worse-than-usual punishment could reflect a lack of long-term confidence among traders, with third-quarter misses signalling a prolonged downturn. The analysts also found mentions of words like “better” or “stronger” against “weaker” or “worse” hitting the lowest gap since 2009, which could be a result of continued trade tensions and souring global economic outlook.

Earnings of the 75 companies to report were 2% above consensus estimates, with healthcare and consumer discretionary companies delivering strong beats. Banks performed in line with estimates despite macroeconomic indicators warning otherwise and recent Fed rate cuts squeezing profit margins.

The current trends are subject to change, especially with 36% of S&P firms slated to report their third-quarter earnings in the week starting Monday. Mega-cap stocks like Microsoft and Amazon will announce their latest figures, and more than half of communication services and energy companies will report as well.


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