"Only Up 0.5%" Despite US Earnings Surprise, Stock Prices 'Stall'

As the second-quarter earnings announcements of U.S. companies near completion, results have exceeded Wall Street expectations, but stock prices have stalled. This is due to the initially low expectations for earnings amid increased economic uncertainty. This week, earnings reports from retailers such as Home Depot, Target, Walmart, and TJX, which can confirm U.S. consumer spending power, will be released one after another.

[Image source=Reuters Yonhap News]

The daily Wall Street Journal (WSJ) reported on the 13th (local time), citing a Bespoke Investment Group report, that the stock prices of companies that posted earnings exceeding second-quarter expectations rose by an average of only 0.5% after their earnings announcements. This is far below the 10-year average of 1.6%.

WSJ conveyed the mood, stating, "Companies are beating Wall Street expectations, but investors are unimpressed," and "They are not rewarding positive earnings surprises." According to FactSet, about 90% of S&P 500-listed companies have reported earnings so far. Among them, 79% have exceeded Wall Street forecasts.

Apple, the company with the largest market capitalization, exceeded expectations in both revenue and net income in its earlier announcement, but its stock price fell 4.8% the next day. PayPal also dropped a staggering 12% the day after reporting better-than-expected earnings. WSJ pointed out that such sluggish market reactions have even halted the New York Stock Exchange rally that had continued this year. The S&P 500 index, which is centered on large-cap stocks, has fallen 2.7% since August began. The year-to-date gain has also shrunk to 16%.

Amanda Agati, Chief Investment Officer at PNC Asset Management Group, evaluated this earnings season as a kind of reality check for investors. She said, "(The New York Stock Exchange rally this year) was a very delusional rally," and pointed out, "At some point, fundamentals become an issue." Despite the fact that the net profits of S&P 500-listed companies, which include many leading U.S. large corporations, have been declining continuously since the fourth quarter of last year, the fact that the New York Stock Exchange had been rallying was itself delusional.

This is also a signal that investors are concerned about economic uncertainty and corporate earnings outlooks. In particular, Wall Street had already lowered corporate quarterly earnings forecasts early on due to inflation-related cost burdens and increased economic uncertainty. Seth Cohan, Vice President of Wealth Alliance, said, "Most of the earnings we have seen are based on initially lowered expectations." Because expectations were low to begin with, corporate earnings surprises have not led to rallies. WSJ also added that in this situation, investors are punishing companies that fall short of earnings forecasts more severely than in previous years.

Wall Street has estimated that the net profits of S&P 500-listed companies for the second quarter will decrease by 7.2% compared to the same period last year. This is a worse outlook than the less than 1% decline that was forecasted until the end of last year. According to FactSet, the net profits of companies that have reported second-quarter earnings so far are estimated to have decreased by about 6% year-over-year.

As the earnings season nears its end, a large number of retailers that can confirm U.S. consumer spending power are scheduled to announce their earnings this week. Following Home Depot on the 15th, retail giant Target and TJX, the parent company of discount stores TJ Maxx and HomeGoods, will report on the 16th, and Walmart and Ross Stores will present their earnings on the 17th. Home Depot, which posted weak results in the first quarter, has lowered its full-year earnings guidance this year. On the other hand, Walmart raised its sales forecast for this year in May, supported by strong grocery and e-commerce businesses.

On the 15th, the July retail sales data will also be released. Wall Street expects July retail sales to increase by 0.4% month-over-month, continuing the rebound trend. If retail figures exceed expectations, optimism that a recession can be avoided is likely to gain more momentum. However, strong consumer data could also support the Federal Reserve's need to maintain high interest rates for a prolonged period. The Fed, which raised the U.S. benchmark interest rate to 5.25?5.5%, is scheduled to release the minutes of the July Federal Open Market Committee (FOMC) meeting on the 16th.

This content was produced with the assistance of AI translation services.