Beating earnings expectations is one of the top goals for companies.
It impresses shareholders. But more importantly, it shows how well their businesses are doing.
And when a large chunk of companies is doing better than expected, it’s exactly what we want to see.
So far, about a quarter of S&P 500 companies have reported first-quarter 2021 results.
Of those, 84% have beat analyst expectations. That’s about as good as it gets.
In fact, according to FactSet, the five-year average for this same point in earnings season is only 74%. We’re well above that, and it’s exciting news.
It shows that our economy is rebounding, and companies are benefiting as the world opens back up.
But there’s one problem: Investors aren’t thrilled…
Buying the Rumor, Selling the News
When companies beat earnings expectations, their shares usually move higher. On average, they see a rise of almost 2% on the good news.
And right now, companies aren’t just beating earnings by a little bit. They’re beating estimates by an average of almost 24%. With that kind of growth, it’d make sense to expect shares to rise.
Yet the opposite is happening. We’re actually seeing stocks decline by an average of 0.6% even after earnings beats. So, investors aren’t rewarding companies for beating estimates this time around.
On Wall Street, this is called buying the rumor, selling the news.
Put simply, it means investors already expected the good news. They already fully priced in the effects of it, even before it became a reality.
In the market, this happens from time to time. Investors expect things like a stimulus bill being passed or a tax cut on the horizon.
In this case, they expected the rebound in the economy as more people get vaccinated and businesses reopen. And they ended up pricing in all the good news already.
It’s why stocks have surged higher since the pandemic-related crash. In just over a year, the S&P 500 and the tech-heavy Nasdaq 100 are up more than 23% and 40% respectively, from their pre-pandemic peaks.
The question now is: Exactly how much more will investors price in?
Regardless of the answer, I’m still excited for the rest of earnings season. Here’s why…
A Strategy to Profit No Matter What Happens Next
We’ve clearly seen how investors are reacting very little despite the phenomenal news this quarter.
This is setting up a unique situation for earnings season. It’s still early. We don’t fully know yet if reality will catch up to expectations of the rebound.
It’s possible that investors may have priced in unrealistic expectations. And if the economy doesn’t come roaring back as soon and as much as they’ve already priced into the markets … we could see a steep correction in the coming months.
I’m not betting on that happening. But even if it does, I don’t have to worry about it — or any other curveball the market throws.
Because I stick to a proven strategy that takes advantage of earnings season in all sorts of market environments. It can produce winners, no matter which way stocks move next.
Of course, just like any investing approach, we might not win all the time. But we’ll be well positioned to profit from both bull and bear markets using earnings as a guide.
I call it my Ultimate Trading Strategy. And it involves a short list of companies I’ve found that have the best track records after earnings.
I want you to see the same potential from this earnings season that I do. So, you’ll want to get in on the action right away before earnings season is over. And you can learn how by clicking right here.
Chad Shoop, CMT
Editor, Quick Hit Profits
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