Investors punish stocks of companies that miss earnings expectations

The stick is being used more than the carrot this earnings season.

This was evident in the declines in the stock prices of companies like Chipotle Mexican Grill (CMG) and Netflix (NFLX) after announcing better-than-expected third-quarter earnings, as well as the small gains given to EQT (EQT) after its win.

Most companies in the S&P 500 have reported quarterly earnings so far, and their overall performance has been positive. However, the rewards for defeat were meager, according to FactSet data, while the punishment imposed on companies that defied expectations was particularly severe.

Companies that failed, on average, saw their shares fall about 5% over the two days before and after their release, according to FactSet, more than the five-year average of -2.6%. Meanwhile, companies that beat third-quarter earnings expectations saw their shares rise just 0.1%, on average, below the five-year average of 0.9%, the research firm’s data show.

Although the market reaction to earnings volatility has been muted, the frequency of impulses is the highest on record outside of the Covid period, according to Goldman Sachs’s David Kostin. More than 64% of S&P 500 companies reported beating consensus EPS estimates by at least one standard deviation, compared to an average of 49% over the past 25 years.

One possible explanation for the slim bonuses is that investors may have viewed positive results as providing less information about companies’ prospects than in previous quarters, at a time when they are particularly hungry for context about what’s to come, Kostin said.

The third-quarter earnings season “came alongside a volatile macro backdrop characterized by renewed trade policy uncertainty and concerns about bank lending, amid other sources of macro uncertainty,” he wrote in a note published last week.