Stocks Are Not Reacting Positively to Earnings in Many Cases

It is still early in this earnings season, but I am already noticing a trend that is concerning. There have been a number of companies that reported earnings and revenue numbers that beat analysts’ estimates, but the stocks have reacted by moving lower or hardly moving at all.

Three banks kicked off earnings season on July 13 and Citigroup and JPMorgan Chase both beat the estimates while Wells Fargo missed on its revenue number. All three stocks dropped after reporting earnings and have since rallied back. The consensus seemed to be that the gains in the bottom line came more from the tax law changes than growth in the business and the trade tensions were a concern as well.

Last week we saw American Express and IBM both beat on both the EPS estimate and revenue estimates and they had the opposite reaction of the banks—they jumped after their earnings reports and then fell in the following days. EBay reported last week as well and it missed on its revenue number and lowered its forward guidance. The stock got punished with a 10% drop the next day. Netflix reported last week and it came up way short on its subscriber growth estimates and the stock fell sharply as well.

Today we saw General Motors and Boeing report. GM beat on the EPS estimate and came up short on its revenue estimates. More importantly, the company lowered guidance and cited the tariffs on steel and aluminum as the reason. This is the first time a company has mentioned the trade tensions as a reason for lowering guidance. I was pretty certain it was going to happen in this round of earnings and I wrote about the possibility earlier this month. GM’s stock was down sharply in Wednesday morning trade.

Boeing had a great second quarter and beat both the EPS estimates and the revenue estimates. The company raised its 2018 revenue guidance by $1 billion, citing services growth, defense volume, and commercial business as the reasons for the guidance boost. Unfortunately the company maintained its 2018 EPS guidance and that didn’t sit well with traders and the stock was down over 3% in morning trading on Wednesday.

There have been a few bright spots—Microsoft and Alphabet (Google’s parent company) are two in particular that have reported better EPS and revenue numbers and have moved higher after the reports. Microsoft is up over 4% since its earnings report and Google jumped 3.9% on Tuesday after reporting after the close on Monday.

Like I said earlier, we are just getting started in this earnings season, but the reactions we are seeing are a concern to me. I see two main reasons for the stocks reacting in the way they have—expectations were too high and the ongoing trade tensions.

I expect more companies to include the trade tensions as a reason for lowering guidance as more industrial and consumer staples stocks report earnings. GM may have been the first company to mention them, but they won’t be the last.

As for expectations, investors might temper their expectations a little after seeing what has happened to the companies that have reported early on. If the sentiment comes down a little and lowers the bar for companies, we might see more positive reactions like we saw from Microsoft and Google and fewer negative reactions. The selloff for Boeing is the one that stands out the most in terms of expectations being too high.

I don’t expect the bullish cycle to come to an end as the result of this earnings season, but I am concerned about next quarter. Especially if something doesn’t get resolved on the international trade situation.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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