Beating expectations is meeting expectations: Morning Brief

Myles Udland

·Head of News

Fri, Oct 23, 2020, 2:58 AM4 min read

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Friday, October 23, 2020

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Corporate earnings are beating expectations at a record rate. Investors are hardly impressed.

Third quarter earnings season is in full swing.

And some early trends are emerging.

For starters, companies are crushing expectations.

According to data from Bespoke Investment Group’s Earnings Explorer tool, some 97 companies through Thursday morning had reported earnings that topped analyst estimates for both revenue and earnings per share since the start of last week. Of these, 22 have not only topped expectations for the third quarter but have also raised their forecasts for the current quarter or year ahead.

Over the last three months, 77.5% of companies reporting results have topped Wall Street forecasts for earnings per share, increasing what was already a record share of companies reporting better-than-expected profits. To say that corporate earnings are faring better than feared is an understatement.

But investors are also growing more reticent to reward these results. And have become quick to punish companies that fall short of expectations. Even modestly.

On Thursday, shares of Chipotle (CMG) fell more than 4.5% after the company said Wednesday that restaurant level operating margins in the third quarter fell to 19.5% from 20.8% in the same quarter last year. And this margin hit coming as same-store-sales turned positive in the third quarter, rising 8.3% after a 9.8% drop in the second quarter.

Of course, we must note that Chipotle has been one of the big winners in the fast food space during the pandemic: from the March 23 market lows through Wednesday’s close the stock rose 141% against a 49% increase for the S&P 500. But embedded in this rally is future earnings growth, and Wednesday’s quarter makes the future appear less rosy than previously believed.

A dynamic investors were quick to react to.

Another high-flying pandemic winner, Netflix (NFLX), also saw its stock similarly punished earlier this week. Shares of the streaming giant fell more than 6% on Wednesday after the company said subscriber growth slowed more than expected in the third quarter.

And both of these stock reactions track what Bespoke’s data suggests. Which is that amid an earnings period of strong results, investors are punishing earnings misses harshly. Just six companies since the start of the month have reported worse-than-expected earnings and revenue, according to Bespoke. Shares of these companies have declined by an average of 4.8% the next day.

In contrast, companies reporting better-than-expected earnings and revenue have seen shares rise by an average of 1.7%. Notably, companies also raising guidance along with besting top and bottom line forecasts are faring even worse, rising an average of just 0.25% during the day after these results.

And an even better outline of just how lukewarm investors have been towards companies that merely meet expectations can be seen in the stock reaction to firms that offer guidance that is in-line with expectations.

Twelve firms have offered in-line guidance and just one of these companies missed on EPS while just two missed on revenue. Results in the most recent quarter for this group, in other words, have been quite strong.

And yet the average one-day stock performance among this group — which includes Netflix, Procter & Gamble (PG), and UnitedHealthcare (UNH) — is a decline of 1.66%.

And so in a market environment during which investors have quickly and enthusiastically looked past a brief but severe recession, a future full of high hopes is coming at the market fast.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today

Economy

9:45 a.m. ET: Markit US Manufacturing PMI, October preliminary (53.5 expected, 53.2 in September)
9:45 a.m. ET: Markit US Services PMI, October preliminary (54.6 expected, 54.6 in September)
9:45 a.m. ET: Markit US Composite PMI, October preliminary (54.3 in September)

Earnings