Unforgiving

A potential character change in the market?

Shown in the chart below, courtesy of 3Fourteen Research, is the aggregate price reaction to Q4 ’24 earnings announcements from S&P 500 companies up to, and including, 20 February 2025.

The good news: EPS ‘beats’ are outpacing EPS ‘misses’ by approximately 1.7x.

The bad news: the average ‘beat’ is generating a paltry 20-day gain of just +1%, whilst companies that ‘miss’ are punished, and are staying down, finding their share price underwater by approximately -1.5% 20 trading days after the announcement.

This behaviour reflects a subtle evolution, and contrasts sharply with the reaction to Q1, Q2 & Q3 2024 earnings announcements.

To recap, the average ‘beat’ from companies during the first three quarters of 2024 generated forward 20-day gains of between +3% and +4.5%, whilst companies that ‘missed’ initially sold-off before rebounding strongly to record 20-day gains of +0.5 to +1%.

In short, the buy-the-dip/FOMO mentality that defined 2024 is, seemingly, no longer with us.

Alongside a host of other factors including, but not limited to,

• weak breadth accompanying last week’s S&P all-time highs,
• valuation differentials vs rest of the world
• sell side strategist FOMO,
• unfriendly seasonality,
• euphoric sentiment,
• elevated risk positioning,
• the Trump factor, and
• the spectre of significant tax-related selling into April…

…it could be argued that the set-up for US risk assets looks considerably poorer than at this stage last year.

(Cover Image Source: Towfiqu Barbhuiya)