Options Show Big Stocks Poised to Go Wild on `Critical' Earnings

(Bloomberg) -- Investors are especially on edge this earnings season -- and for good reason.

The tax-induced jolt to profits is waning. Waxing are global growth concerns, interest rates and input costs amid a prolonged trade dispute between the world’s two largest economies. All the while, cyclically significant sectors such as homebuilders and banks are trading like there’s something wrong with the U.S. economy.

Add it up, and it’s little wonder that options markets are pricing above-average stock swings from companies releasing results, according to Credit Suisse Group AG.

Companies reporting this week have option-implied moves of 3.9 percent, three tenths of a percentage point above the average of their past 10 reporting periods. For the three colossal U.S. companies issuing results in the next two days -- Microsoft Corp., Amazon.com Inc. and Alphabet Inc. -- implied moves are half a percentage point bigger than normal.

Options Show Big Stocks Poised to Go Wild on `Critical' Earnings

S&P 500 Index constituents that have reported so far have seen their shares move 3.3 percent as traders digest the releases, compared with realized moves of less than 3 percent on average over the past 10 years.

“This shows how critical Q3 earnings will be in terms of providing market direction going into the end of the year,” said Mandy Xu, chief equity derivatives strategist at Credit Suisse. “Investors are looking to company guidance to see what impact slowing China growth, rising trade tensions and higher borrowing costs will have on revenues and margins.”

Equity Tumult

The recent tumult in equity markets has seen realized correlations rise as stocks tumble together -- the opposite of what generally happens during earnings season, when investors focus on company-specific drivers.

The overhang of a trade war may bear part of the blame. The beat rate on earnings this during this reporting season, however, has been substantially higher than for revenues, which clashes with the narrative that these rising costs have broadly crimped margins. But with industrial bellwether Caterpillar Inc. citing elevated expenses due to tariffs and multinationals like Ford Motor Co. already bemoaning high steel costs, this may signal that the drag on profitability from international disputes over commerce is poised to intensify in the coming quarters.

Despite the market chaos and jitters surrounding this round of corporate results, implied correlations for the S&P 500 and Nasdaq 100 constituents are off their highs, suggesting a return to a more fundamentally driven environment is at hand.

Options Show Big Stocks Poised to Go Wild on `Critical' Earnings

Sentiment Disconnected

Unusually large expected moves on earnings alone aren’t enough to scare investors. But throw in the disconnect between results and reactions this reporting season, and the picture gets gloomy fast.

Case in point: Netflix Inc. The video streaming company was up double-digits in the after-hours session after exceeding analysts’ expectations on subscriber growth as well as top- and bottom-line performance. Most of those gains faded throughout the next trading day; shares are now down nearly 5 percent since earnings, while the Nasdaq 100 is off less than 2 percent during that stretch.

Options Show Big Stocks Poised to Go Wild on `Critical' Earnings

Netflix is the rule, not the exception. Companies reporting better-than-anticipated profits have been unable to sustain a bid. On average, their shares have fallen 0.9 percent from open to close in the session following the release, according to Bespoke Investment Group’s earnings screener.

“In general, earnings reactions have been extremely weak, especially for companies reporting solid numbers,” said George Pearkes, chief macro strategist at Bespoke. “That can possibly turn around but thus far the selling on beats has been remarkable and suggests very weak sentiment that has disconnected to actual reported numbers.”

It’s a replay of what happened in the early portion of the first-quarter reporting season, when firms reporting solid financial performance popped upon the release only to drop thereafter.

All this raises the stakes for this week’s releases, since it might take a major report to break this spell. That was the case last time, when Facebook Inc.’s stellar first-quarter results helped traders refocus on fundamentals. From April 25 through the end of that reporting period, the average stock reporting earnings gained 0.3 percent during regular trading hours.

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