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U.S. stocks have been more volatile than usual following recent corporate earnings reports, as high valuations and an uncertain outlook have investors worried.
Wall Street’s benchmark S&P 500 index has been uncharacteristically calm in recent weeks, having not moved more than 1% in either direction every day for more than a month. But for many individual members, the movement is much more volatile.
Tesla, Philip Morris International, and Netflix are among the major companies that enjoyed daily stock increases of more than 10% after reporting strong third-quarter results this month. Companies like Lockheed Martin and HCA Healthcare suffered some of the biggest declines in years.
“Right now, the rewards and penalties for returns are very high…we’re seeing price movements of 10 to 20 percent or even more,” said Heather, CEO of Diamond Hill, an asset management firm specializing in value investing.・Mr. Brilliant said. With valuations already inflated, “if something underperforms a little bit, people think, ‘I don’t need that in my portfolio.'”
Stocks that missed earnings estimates this earnings season underperformed the broader S&P 500 index by an average of 3.3 percentage points the day after the release, according to a Bank of America analysis based on data through Thursday’s market close. Historically, stocks that missed expectations tended to underperform by a more modest 2.4 percentage points.
Most large companies do their best to lay the groundwork ahead of earnings so that analysts can come up with realistic but winnable forecasts, so if they miss a forecast, the stock’s price increases more than if they beat expectations. The reaction tends to be stronger. But the top-predicted stocks also rose more than usual, outperforming the broader market by 2.7 percentage points compared to an average of 1.5 percentage points.
“The reaction was particularly strong in areas like financials…which are not very well-held by investors,” said Savita Subramanian, equity and quantitative strategist at BofA. “The positive surprise almost forced investors to go long.”
Investors and analysts cited several reasons why the recent move is particularly strong.
Some are due to simple seasonal factors. David Giroux, head of investment strategy at T. Rowe Price, which manages the firm’s $65 billion capital appreciation fund, said this is a time when companies often provide more guidance on their medium-term outlook. He said third-quarter profits tend to provoke a stronger reaction. The year ahead.
“There are a lot of companies whose outlook through 2025 is a little disappointing, and the market has hit them very hard,” he said.
But the unusual market conditions are also impacting investors, with indexes trading at record highs despite geopolitical tensions, an uncertain interest rate outlook and the impending US election. The S&P 500 index trades at a forward 12-month forward P/E ratio of 21.7 times, compared to a five-year average of 19.6 times, according to FactSet.
“There are a lot of big catalysts happening in the market at the same time right now,” said Binky Chadha, chief global strategist at Deutsche Bank. “There are earnings, there are elections, there are geopolitical risks. . . . Given the large number of catalysts, the market is kind of in a state of tension, and a market in tension will react even more in both directions.”
Chadha cautioned that more than half of companies are still waiting to release their earnings, and that trend could change later in the earnings season, especially once election-related uncertainty begins to fade.
Meanwhile, investors are looking for opportunities amid volatility.
“All of this points to a really good old-fashioned stock-picking market,” Subramanian said. “We’re in an environment where we’re not just taking a ‘buy mega-cap tech’ approach, but actually moving forward and looking for companies with amazing upside.”
“On the one hand, it’s frustrating to see stock prices decline more than they should in short-term stocks rather than long-term ones,” T. Rowe’s Giroux said. “But on the other hand, the excessive volatility in the market is a cause for caution. Investors tend to take advantage of that volatility; if they like the stock over the next three to five years (and buy it on the spur of the moment), their expected returns will only increase.”
