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The market is getting 'more discriminating' during earnings season

Wall Street is getting harsher on companies whose earnings come in below analyst expectations.

This could be rewarding for active fund managers who seek out stocks that may sell-off sharply if their results don’t match up to their guidance or analysts’ expectations.

“The market has become more discriminating during earnings season, which is a positive for stock pickers,” said Chris Harvey, a senior analyst at Wells Fargo, in a note on Sunday. “This suggests that stock pickers may want to spend more time on what they want to avoid or sell rather than what they would like to overweight or buy.”

Shares of companies that miss on earnings are being sold more aggressively:

Screen Shot 2017 07 17 at 8.18.46 AMWells Fargo

And over the last three years, the gap between the one-day rallies and sell-offs after earnings has widened as companies that miss are sold off more aggressively:

Screen Shot 2017 07 17 at 8.23.02 AMWells Fargo

The stakes are as high as ever for second-quarter earnings, which kicked off late last week. It’s especially important for the tech and financial sectors to impress Wall Street, having led the market’s climb to new highs and enriched various gauges of its value.

Earnings beats are outperforming misses so far, according to Wells Fargo. Shares of companies that beat have outperformed the S&P 500 by 0.52%, while misses have underperformed by -1.81%.

JP Morgan, Citigroup, and Wells Fargo all fell on Friday despite beating earnings expectations, reflecting some concern that after their post-election surge may be followed by modest revenue growth.

Netflix on Monday will be the first big tech company that announces second-quarter earnings.

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