Corporate earnings were great this quarter. Wall Street is still not impressed.
Four of five S&P 500 companies are beating estimates, but investors aren’t rewarding them for their performance.
American companies are turning in one of their best quarters in years. Wall Street has just shrugged.
Of the 446 S&P 500 companies to report third-quarter results so far, more than 80% of them beat analysts’ estimates, according to LSEG I/B/E/S data. That is the biggest crop of outperformers since the spring of 2021. But no matter how many times those analysts might have uttered the words, “great quarter, guys," in recent weeks, the message hasn’t reached stock investors.
The S&P 500 is only up 1.3% since Oct. 14, when JPMorgan Chase and other big banks kicked off the season with strong results. Furthermore, the median stock among S&P 500 companies that beat its earnings estimates bested the broader benchmark by only 0.3% in the day after it reported, according to an Oct. 31 report from Goldman Sachs analysts. The historical average, Goldman said: about 1%.
Why good earnings aren’t moving the needle for investors as much as they often do has a lot to do with the market’s monthslong climb to record highs. As stocks reached new records, the expectations for corporate results also moved higher.
“The market has been filled with steamroller momentum for the last four months, so it doesn’t shock me that even surprisingly good earnings are being met with a bit of exhaustion," said Chris Grisanti, chief market strategist at MAI Capital Management.
Investors, though, aren’t just tired from all of that winning.
Last week, concerns that tech companies were overspending on AI initiatives pulled the Nasdaq Composite Index into its biggest weekly decline since April. Surveys on consumer sentiment and job cuts gave investors new reasons to fret about the health of the overall economy. The broader S&P 500 ended the week down 1.6%.
Even before the early November selloff, some investors were skeptical of the valuations touched by the market’s largest and hottest stocks. Giant tech companies, many of which have been the biggest beneficiaries of the enthusiasm over artificial intelligence, are now trading at dozens and sometimes hundreds of times their projected earnings.
One valuation metric popularized by Nobel Prize-winning economist Robert Shiller, the cyclically adjusted price/earnings ratio, has surged to levels seen only once before, during the dot-com boom.
As the market’s gains grew more dependent on the outlook for AI, investors have started to look past big tech companies’ near-term results and into a future where all of their investments are expected to pay off. And they are beginning to get nervous.
“Investors were coming into earnings season more concerned that they might have overvalued stocks," said Ed Yardeni, president of Yardeni Research. That meant good reports were more likely to be met with “a sigh of relief, more than a surprise," he said.
When Facebook parent Meta Platforms announced record quarterly sales on Oct. 29, the stock tumbled 11% the following day. Why? Because the company revealed that its AI spending plans, already eye-watering, would only increase in 2026.
Then, on Nov. 3, data analytics company Palantir reported record revenue and lifted its revenue guidance for the full year, adding that it expected its U.S. commercial business to more than double. The stock promptly slid 8%.
Robinhood Markets suffered a similar fate. The brokerage known for its trading app reported record revenue and more than tripled profits. Still, the stock sank nearly 11% the next day because some analysts and investors concluded expenses were too high and its crypto-trading business looked a little light.
There are still some 54 S&P 500 companies on deck to share their results, including major retailer Walmart and AI poster child Nvidia.
Some investors think a pullback was bound to happen in a market that has looked increasingly frothy. Grisanti isn’t too worried; he pointed to the fact that stocks historically tend to rally in the final few weeks of the year.
“I’m not at all concerned at this moment that we’re not off to the races," he said. “It seems natural—in fact, it is probably healthy—that we’re consolidating some of these huge gains we’ve made."
Write to Hannah Erin Lang at hannaherin.lang@wsj.com
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