Earnings Miss? Stock Slaughter: How Investors Ruthlessly Punish Underperforming Companies

Wall Street's earnings season turns into a bloodbath for laggards

Subheader: The Market's Zero-Tolerance Policy

One penny shy of expectations? That'll cost you 10% of your market cap overnight. Welcome to modern equity markets - where algorithms execute judgment before the CEO finishes their apology speech.

Subheader: Whisper Numbers vs. Reality

The real tragedy? Most 'misses' beat last year's numbers. But growth markets demand perfection - or at least the illusion of infinite scalability that crypto natives perfected years ago.

Closing jab: Maybe these CEOs should try the crypto playbook - just announce an AI partnership and watch the shorts cover.

Key Takeaways

• Shares of companies that have missed earnings expectations this quarter fell almost 5%, on average, a bigger negative reaction than in years past, according to FactSet.
• The pace of earnings beats, however—excluding the Covid period—has been "unprecedented," Goldman Sachs' David Kostin said.

The stick is getting more use than the carrot this earnings season.

That has been evident in the share-price declines in the stocks of companies like Chipotle Mexican Grill (CMG) and Netflix (NFLX) after reporting third-quarter earnings that missed expectations, as well as the meager gains awarded to EQT (EQT) after its beat.

Most of the companies in the S&P 500 have reported quarterly earnings by now, and their overall performance has been positive. The rewards for beating, however, have been miserly, according to FactSet data, while the punishment for the firms that missed expectations have been particularly stern.

Companies that missed, on average, saw their stocks decline almost 5% over the two days before and after their releases, according to FactSet, more than the five-year mean of -2.6%. Meanwhile, those that beat third-quarter earnings expectations have seen their stocks rise just 0.1%, on average, below the 5-year average of 0.9%, the research firm's data show.

Why This Matters to Investors

Traders appear to be seeing the glass as half-empty this earnings season, with stock price action skewed to the negative even as companies in the S&P 500 have posted positive surprises at a record pace.

Though the market's reaction to earnings beats have been muted, the frequency of beats are the highest on record outside of the Covid period, according to Goldman Sachs' David Kostin. Over 64% of the S&P 500 companies that have reported beat consensus EPS estimates by at least one standard deviation, compared to the average of 49% over the last 25 years.

One possible explanation for the diminutive rewards is that investors may have viewed even positive results as offering less information about the companies' outlooks than in prior quarters, Kostin said, at a time when they're particularly hungry for context about what's to come.

The third-quarter earnings season "has taken place 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.

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