The Q2 earnings season has not only surpassed Wall Street's expectations but has also outpaced the long-term historical average, indicating a robust quarter for American companies.
The latest data unveiled by FactSet Research Systems Inc.
Equally encouraging is the magnitude of the earnings beats. Overall, earnings have exceeded estimates by 7.2%, slightly lower than the 5-year average of 8.4%, but higher than the 10-year average of 6.4%.
However, despite these positive earnings surprises, the reaction in the stock prices of these companies has been quite unexpected.
Positive Earnings, Puzzling Market Reaction
FactSet has uncovered a peculiar trend. Companies that have beaten analysts' earnings estimates for Q2 2023 have witnessed an average price decrease of 0.5% two days before the earnings release through two days after.
This figure starkly contrasts with the 5-year average price increase of 1.0% during the same period for companies with positive earnings surprises. Should this trend persist, it would mark the largest average negative price reaction to positive EPS surprises since Q2 2011 (-2.1%).
Tesla And Microsoft: Two Textbook Cases
Tesla Inc.
Similarly, Microsoft Corp.
Unraveling The Market Mystery
Earnings watchers are perplexed by this unexpected market behavior. Contrary to common assumptions, the market is not punishing positive EPS surprises due to pessimistic earnings outlooks for the third quarter.
Among the S&P 500 companies that have issued EPS guidance for Q3 2023, 62% have issued negative guidance, aligning with historical averages.
Additionally, analysts have made only minor changes to EPS estimates for Q3 2023 during July, indicating no significant downgrades to earnings expectations.
Is Stock Expensiveness To Blame?
While FactSet has not pinpointed a specific cause for the unusual market reaction to positive earnings, the financial data company has highlighted that stocks are beginning to show signs of overvaluation.
The forward 12-month P/E ratio for the S&P 500 currently stands at 19.2, which is higher than both the 5-year average of 18.6 and the 10-year average of 17.4.
An additional significant factor is that the Information Technology and Consumer Discretionary sectors, which led in positive earnings surprises, also boast the highest forward 12-month P/E ratios, standing at 27.0 and 25.7, respectively.