S&P 500 Earnings Beats Fall Flat With The Good News Priced In

(Bloomberg) -- Investors have greeted a stellar second quarter earnings season for U.S. companies -- with a yawn.

A large swath of S&P 500 companies surpassed Wall Street profit estimates, but their shares barely budged. It’s the second consecutive quarter of a lackluster response to earnings beats, fueling the case that U.S. stocks are due for a pullback after an 18% rally this year.

The tepid response comes as cases of the delta variant are on the rise and Wall Street banks themselves scale back return-to-office plans. Recent rallies in Amazon.com Inc. and other megacap tech stocks that typically drive gains in the benchmark index also have stumbled.

“Earnings season suggests that a lot of the good news has been priced in,” Bank of America equities strategist Jill Carey Hall said in an interview on Bloomberg TV on Friday. “Companies that beat just aren’t outperforming very much.”

With results in from most of the S&P 500 Index, 85% of companies have exceeded profit estimates, according to data compiled by Bloomberg. On average, their stocks have advanced 0.2% the day after earnings. That echoes a similar trend in the first quarter, when stocks declined an average of 0.1% following good results.

Investors so far have turned a blind eye to the concerns brewing in the background as the S&P 500 rallied to fresh highs. Despite historically lofty valuations, the prospect of prolonged price inflation, the scaling back of monetary stimulus and rising Covid-19 infection rates, the focus has been on expectations for companies to continue churning out bigger profits and low interest rates.

Goldman Sachs remains bullish about the upside for U.S. stocks. Citing both of those factors, the bank last week raised its year-end target for the S&P 500. Strategists led by David Kostin forecast the index will finish 2021 at 4,700, implying an advance of nearly 6% from Friday’s closing price and an increase from the previous estimate of 4,300.

“Relative to consensus, we expect stronger revenue growth and more pretax profit margin expansion as firms successfully manage costs and as high-margin tech companies become a larger share of the index,” the strategists wrote in a research note.

Megacap Slump

The initial post-earnings performance of technology stocks, the biggest five of which account for more than a fifth of the S&P 500, was particularly weak. For tech companies that have reported so far, 94% have beaten earnings estimates, yet the stocks have fallen an average of 0.6% the following day, according to data compiled by Bloomberg.

“When valuations are this expensive, earnings really need to step up,” said Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. “Tech earnings did step up, but the problem that they face is so did everybody else.”

The tech-heavy Nasdaq 100 Stock Index had outperformed the S&P 500 heading into earnings season as investors positioned for slowing growth in more cyclical sectors, like financials and industrials, and bet that technology companies could continue expanding sales at a similar clip. Some disappointing forecasts from the megacap group helped temper that trend after companies like Apple warned that growth is poised to slow.

For David Donabedian, chief investment officer at CIBC Private Wealth, the cool response to earnings isn’t cause for concern. He expects stocks can still end the year higher than current levels, but with cyclicals taking the lead on economic expansion.

“The economy is going to grow above trend, not just through the end of this year, but through 2022 as well,” he said in an interview. “You’ll see some of these cyclical names do very well.”

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