Strong Earnings Surprises Fail to Excite Amid Economic Risks

Companies in the S&P 500 are blowing away earnings expectations at a historic pace, but you would never know it to from looking at the major indexes.

Stocks have been struggling as a resurgence in the Covid-19 pandemic weakens the economic outlook while the upcoming U.S. elections -- a major source of uncertainty -- overshadow news out of corporate America that has been almost uniformly better than expected.

Nearly 320 companies in the S&P 500 have reported so far this season, and they have beaten consensus forecasts for earnings at a record pace of 87.7%, according to an analysis of Bloomberg data. About three-fourths of the companies that reported have topped revenue expectations, also a record pace. Despite that, major indexes have been trending lower, with the S&P 500 plunging 5.6% last week and down almost 9% from its last record in September.

“Earnings are coming in well above expectations, but the market just doesn’t care,” said Michael Mullaney, director of global market research at Boston Partners, which has about $65 billion in assets under management. “You still have Covid, you still have lockdowns, and you still have the election. All of those are what’s driving investor psyche right now.”

This past week featured results from many of the market’s biggest names, including Apple Inc., Microsoft Corp., Amazon.com Inc., and Facebook Inc. While all beat expectations on key metrics, the stocks had negative reactions to the reports, raising new concerns about tech valuations. Alphabet Inc. was an exception, rallying 3.8% after its report.

Strong Earnings Surprises Fail to Excite Amid Economic Risks

“U.S. stocks have been correcting since September on a host of issues, but the technology sector’s sputtering momentum is at the core of the struggle,” wrote Gina Martin Adams, chief equity strategist at Bloomberg Intelligence, in a report last week. “Valuations may continue to normalize as tech’s earnings supremacy is tested.”

Based on the number of S&P 500 components that have already reported, the earnings season is about two-thirds completed. Still, a number of closely watched companies are on the docket this week, including: PayPal Holdings, Qualcomm Inc., General Motors Co., Uber Technologies Inc., and T-Mobile US. Regeneron Pharmaceuticals and Bristol-Myers Squibb are also scheduled to report, as is China’s Alibaba Group Holding.

Tuesday’s election is likely to be the key driver for stocks this week, with a contested result seen as a worst-case scenario for equities.

“The election is enormous for the market,” Mullaney said by phone. “Compared with earnings, it isn’t even close. You may see some idiosyncratic moves for the companies that really surprise, but the election is the issue this week.”

©2020 Bloomberg L.P.

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