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Futures are modestly higher this morning after the July ADP report came in better than expected, erasing a streak of three months of weaker-than-expected readings. Q2 advance GDP was also just released and came in stronger than expected (3.0% vs 2.6%). Personal Consumption was weaker than expected (1.4% vs 1.5%) while the inflation data was mixed (lower than expected at the headline, higher than expected on a core basis). While these would be big reports on a normal day, we still have the Fed this afternoon and earnings from Meta and Microsoft after the close.
We’re right in the thick of earnings season, and we’ll see hundreds of more reports between now and the end of the week. From the start of July through Tuesday morning, we’ve already got 461 reports, and of those, 78% exceeded EPS forecasts while 75% have topped sales estimates. Looking forward, 8% of companies reporting have raised their guidance, while just 6% have lowered their estimates. These are all better than average readings, and as you would expect, companies are reacting positively to these reports. Overall, the average opening gap of the companies reporting has been a gain of 0.94%, but from the open to close, we’ve seen selling into strength with an average decline of 0.52% for a full-day gain of 0.41%. On the one hand, the average positive reaction to earnings reports is a good signal, but the weakness from the open to close indicates that investors are taking profits.
Despite the overall positive tone of reports, yesterday we saw multiple stories highlighting four stocks and their negative reaction to earnings as a potential warning sign for the economy and market. Those four stocks were PayPal (PYPL), Stanley Black & Decker (SWK), United Parcel Service (UPS), and Whirlpool (WHR), and all of them were down at least 7%.
Besides the fact that these four stocks have a combined market cap of less than $160 billion, which wouldn’t even be enough to rank in the top 75 companies in the S&P 500, they have all historically had weak reactions to earnings, especially in recent years. The chart below shows each stock’s performance on its earnings reaction days over the last five years. All four have averaged declines of at least 1.6% on their earnings reaction days, and only PYPL has reacted positively more often than it has reacted negatively.
More importantly than the performance on their earnings reaction days, all four stocks have been horrendous performers over the last five years. As shown in the chart below, at one point in the last five years, all four stocks were up at least 40% from where they traded five years ago, but they have erased those gains and more over the last five years. UPS is down 36%, WHR is down 48%, while PYPL and SWK have both lost over half of their value. During this same period, the S&P 500 has rallied 96%. Far from being economic or market bellwethers, these stocks have been among the S&P 500’s worst performers over the last five years! We could highlight any number of reasons why investors should be more cautious heading into the end of summer, but the fact that four stocks that have historically performed poorly on earnings saw weakness yesterday is not one of them.
