Stellar Earnings Land With Thud in Market That Saw Them Coming

The first-quarter earnings season is shaping up to be a blockbuster one for corporate profits. You would never know it judging from the reaction in the stock market.

Results are in from more than half of the companies in the S&P 500 Index and 87% have beaten earnings estimates, on track for the best reading since Bloomberg began compiling the data in 1993. However, champagne corks aren’t exactly popping on Wall Street. The shares of companies that reported so far have fallen 0.2% on average in the session after earnings.

That trend was hard to ignore this week after banner earnings results from the five biggest U.S. technology stocks weren’t enough to lift the S&P 500, which was little changed in the five sessions. The lackluster response is a sign that most of the recovery in profits from last year’s pandemic lows was well-anticipated amid a 62% jump in the S&P 500 over the last 13 months, according to investment professionals.

“Typically, we see an earnings recovery and that’s when the market takes off after a recession,” said Jerry Braakman, chief investment officer of First American Trust. “Because of unprecedented stimulus, we almost had a market recovery before an earnings recovery.”

Stellar Earnings Land With Thud in Market That Saw Them Coming

No sector encapsulates the trend of impressive financial results and tepid stock responses better than technology, the worst performing group this week with a 2.1% decline. Of the main groupings in the S&P 500, tech so far has had the highest rate of profit beats at 95%. The stocks, however, have fared the worst in the session that followed, falling an average of 1.6%.

Take Microsoft Corp. The software company delivered $2 billion more in profit than analysts projected and the stock fell nearly 4% over the following three days. Apple Inc.’s quarterly sales were an eye-popping $12 billion higher than the average estimate, yet investors fretted about the risk of more supply chain disruptions due to component shortages. The stock? Down 2.1% on the week.

Covid Impact

A renewed pickup in Treasury yields is also being watched by investors in high-growth tech stocks, as previous episodes of rising interest rates this year have tended to hurt the group. Ten-year yields climbed seven basis points to 1.63% in the past five days, snapping a three-week streak of declines. Energy stocks were the best performers thanks to higher crude prices and strong earnings from oil companies like Hess Corp., followed by communications services and financials.

Tech companies, whose businesses in many cases have thrived over the past year, have seen their earnings estimates for the first quarter rise less than other sectors that were hurt more by Covid-19, according to Gina Martin Adams, Bloomberg Intelligence chief equity strategist. That’s made it harder for tech to impress relative to other industries, she said.

While tech companies are generally having a good earnings season, the group is beating analysts’ estimates by a margin well-below that of cyclical sectors like energy and consumer discretionary, according to James Pillow, managing director at Moors & Cabot Inc.

“Expectations were very high for the tech sector -- not so much within the more cyclical sectors,” he said. “Money usually follows the surprises.”

©2021 Bloomberg L.P.

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