SUPERNEWS

Macro

Investors Demand More Than Just Earnings, Eye AI & Rates Impact

Despite 79% of S&P 500 firms beating expectations, investor reactions remain muted amid high valuations and cautious outlooks.

By Athena Xu

ᐧ

5/2, 04:55 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Eli Lilly and Company
NXP Semiconductors N.V.
SPDR S&P 500 ETF TRUST
article-main-img

Key Takeaway

  • S&P 500 firms beating profit expectations yet see minimal stock outperformance, highlighting investor demand for exceptional earnings post-rally.
  • Companies missing forecasts face severe penalties, with a median lag of 3.7% against the S&P 500, indicating high market expectations.
  • Despite a strong start to earnings season, fewer US companies are raising guidance, reflecting caution amidst economic uncertainties and interest rate concerns.

Earnings Season Underwhelms

Despite 79% of S&P 500 firms beating profit expectations this quarter, the median stock barely outperformed the index on results day, marking the smallest margin since late 2020. This muted reaction suggests that after a record first-quarter rally, which saw the S&P 500 surge 28% from October lows through March, investor expectations were significantly heightened. High valuations, with a price-to-earnings ratio over 20, have left little room for error. Michael O’Rourke, chief market strategist at JonesTrading, noted that the market was "nearly priced to perfection," leading to sharp price adjustments on any signs of disappointment.

Guidance Raises Rare

The proportion of U.S. firms raising guidance this quarter fell to the lowest since 2020, with only 4.4% of companies doing so. This cautious outlook reflects concerns over the U.S. economy's resilience and the Federal Reserve's stance on interest rates, which has shifted from expectations of cuts to a more hawkish outlook amid persistent inflation. Despite some firms like Eli Lilly & Co. and NXP Semiconductors NV reaping rewards for strong forecasts, the overall sentiment has been dampened by fewer companies boosting their outlooks.

AI and Interest Rates Impact

The earnings season has also put a spotlight on artificial intelligence (AI) and the impact of rising interest rates. Investors have shown an intolerance for vague promises regarding AI adoption, seeking concrete evidence of benefits. RBC Capital Markets strategist Lori Calvasina highlighted this trend, noting a lack of patience among investors for companies merely stating that AI integration will take time. Additionally, the jump in Treasury yields has detracted from the allure of solid earnings, with strategists like Morgan Stanley’s Michael Wilson pointing to higher yields as a key factor dimming the earnings shine.

Street Views

  • Michael O’Rourke, JonesTrading (Neutral on the S&P 500):

    "A price-to-earnings ratio of over 20 had left the index 'nearly priced to perfection.' Therefore when a company disappoints, prices are likely to readjust sharply lower."

  • Lori Calvasina, RBC Capital Markets (Neutral on AI adoption in companies):

    "I’m seeing an intolerance for the ‘we need to be patient’ conversation. The ‘wait and see, this is going to take time’ — investors don’t seem to have a lot of patience for that."