Earnings Volatility Jumps in U.S. as Moves Biggest Since ’12Oliver Renick
Investors in U.S. stocks are rediscovering the power of earnings.
In the Nasdaq 100 Index, companies have swung up or down an average of more than 5 percent immediately after reporting results in the past three weeks, the highest since 2012, data compiled by Bloomberg show. Those that disappoint investors tumbled 4.8 percent while those pleasing them gained 5.3 percent.
Bigger distinctions are being drawn between winners and losers in a market where overall profit growth has ground to a halt and equity returns have slowed after a six-year advance. For fund managers that struggled to beat indexes for the last two years, larger post-earnings swings are a chance for stock picking skills to shine again.
“It’s music to my ears,” said Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business, which oversees $2.4 trillion. “It indicates the market is moving beyond the Fed raising rates, Greece and China, and getting down to brass tacks about what drives stock prices.”
Bigger reactions to profit reports are one of the only examples of motion in an otherwise stagnant equity market. The Standard & Poor’s 500 Index this month traded in the tightest range ever as the benchmark gauge moved an average 0.56 percent per day, compared with 0.75 percent since the bull market began in March 2009.
With 65 companies in the Nasdaq 100 reporting, stocks are moving at a market-adjusted rate of 5.1 percent in either direction in the session immediately after the release of results. That compares with a 15-year high of 7.4 percent in the third quarter of 2008 and an average 3.7 percent jolt last quarter, the smallest since at least 2006.
The S&P 500 slipped 0.2 percent to 2,100.39 at 9:50 a.m. in New York, while the Nasdaq 100 cclimbed 0.2 percent to 4,599.82.
More volatile trading after earnings releases may be a sign that the indiscriminate buying that drove U.S. stocks up 211 percent since 2009 has run its course, said Steve Wruble, chief investment officer at RiskX Investments.
“Common sense tells you that at market tops, you trim winners and get rid of the losers,” Wruble, who oversees about $1.2 billion at Portland, Oregon-based RiskX, said by phone. “An earnings miss is an excuse to get out of stocks that are growing at higher valuations. When there is opportunity or risk, it appears to be magnified because of some skittishness in the market.”
The explanation isn’t in the results themselves. Since the first quarter of 2014, Nasdaq companies have beaten earnings estimates by an average 5.4 percent. This quarter, they’re surpassing targets at the same rate, even as their earnings-related moves swing 39 percent wider than the average since 2010.
That didn’t keep investors from piling into stocks like Western Digital Corp. and Check Point Software Technologies Ltd., which rose at least 7 percent after surpassing analyst estimates by a smaller margin than the overall index. Small misses, such as the 1.1 percent disappointment by TripAdvisor Inc. and 1.6 percent shortcoming by Whole Foods Market Inc., led to reactions more than twice as big as the index average.
One reason investors are drawing greater distinctions among companies is that overall S&P 500 profit growth is forecast to slow to less than 1 percent in 2015, down from an annual rate of 15 percent since 2009.
Stronger reactions in Nasdaq 100 stocks partially reflect its makeup, an analysis by RBC Capital Markets suggests. During this earnings season, technology companies and makers of nonessential consumer goods have seen the biggest moves -- and they account for almost three-quarters of the Nasdaq gauge.
“Whether it’s a new tech name that disappoints after a lot of optimism going in or an old tech name that disappoints because they’re losing market share, the dichotomy between winner-takes-all and the losers is bigger,” Jonathan Golub, chief equity strategist at RBC, said in an interview.
Positive results are leading to share spikes that are more than 10 percentage points away from the average decline in losers, a gap between the two that rivals the widest since 2012, according to data compiled by Bloomberg.
The dichotomy may be related to company valuations as well. The average price of companies with the biggest reactions to earnings is 41 times annual profit, compared with 29 times for companies with smaller moves.
“It’s getting tougher to find a lot of earnings growth in a somewhat-rich market,” Daniel Morris, global investment strategist at TIAA-CREF Asset Management in New York, said by phone. His firm oversees about $869 billion. “You’re looking for those stocks that hopefully are going to surprise positively. Everyone will be chasing these stocks.”
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