The title of today’s piece is obviously a bit facetious. If you are the shareholder of any company, little matters more than the bottom line. Yet there are two nuances inherent in the title that are indeed critical to investors in the market at large.
First, in a market environment where the vast majority of companies beat their published consensus EPS estimates it is becoming increasingly clear that investors are looking past that number. Think about the market’s reaction to Meta Platforms’ (META) earnings, about which we wrote at the time:
Although META’s $4.71 adjusted EPS beat consensus estimates of $4.55, we’ve come to learn investors look much deeper than EPS, especially for closely watched companies. Think about this: if roughly 80% of S&P 500 (SPX) beat their estimates in any given quarter, why don’t that many routinely rally after their earnings. Better than expected EPS is now to be expected, so it behooves investors to look at other metrics in a more granular manner.
In the case of META, investors focused on two key negatives: lower second-quarter revenue guidance (a range of $36.5-$39 billion, putting its $37.75 midpoint below the estimate of $38.3 billion), and continued willingness to spend on areas like mixed reality and artificial intelligence. In theory, a modest revenue miss shouldn’t lop 10% off the value of a stock, but when that stock has performed spectacularly well and sports a highly premium valuation, there is little room for disappointment.
We’ve previously questioned whether the continual ability of companies to exceed published estimates says more about their executives’ ability to manage their analysts than their bottom lines. It appears that there is some extra consideration placed upon the former – that companies have simply gotten better at managing their coverage analysts’ estimates – which means that investors are looking beyond the obvious and expected EPS beats.
Second, it appears that with the exception of megacap companies that influence major indices by their sheer size, major misses are not having a significant effect on the market’s overall mood. Yesterday’s results from Disney (DIS) and Palantir (PLTR) were widely reported disappointments, even though both handily beat their consensus EPS estimates. The former closed down -9.5%, and the latter down over -15%. But neither of those downswings had much of an impact on the market’s movement. In Canada, however, the benchmark S&P TSX60 Index was unable to escape the gravitational pull of a 20% downdraft in Shopify (SHOP) — either the 2nd or 3rd largest component of the index, depending on the day. Perhaps we need to come up with a classification “too big to ignore.”
Yesterday’s US trading was more about the attempt at SPX 5,200, which failed and caused most of the day’s gains to fade. Bearing in mind that Monday’s rally was on light volume, and that about 1/3 of that day’s gains occurred in the run-up to the close, it will take a bit more than hope to push us to fresh all-time highs. It will take a volume thrust. And on days when companies might beat their estimates yet still get whacked, that is not a big help to that effort.
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Tech is driving this rally and overpriced. Apple is ready to fall from the tree.
From here I can see a test of 4800/4900. It’s going to be a long summer waiting on election.
Couldn’t agree more with this insight. Thanks for sharing
Thanks for engaging!
The market often rewards the contrarian view, but “Sell in May..” has been so popularized tat it is hard to say whether it is the contrarian view. What I’ve observed is that it is hard for most to sell when the market is moving at a peak. However, selling something at such time, seems to have the worst consequences of pangs of missing further gains and a heavier tax burden a year hence. I expect no letters of condolence.