Market on Fire, but Earnings Sound a Note of Warning

The volatility index suggests forthcoming tranquility, yet recent earnings’ impact on individual stocks has been tumultuous. Brace for potential turbulence returning sooner than anticipated.

Recent market growth saw the S&P 500 index surge by 5.9%, marking its best week since November 2022. The Dow Jones Industrial Average and Nasdaq Composite also soared by 5.1% and 6.6% respectively. This surge followed the Federal Reserve’s decision to withhold interest rate hikes and a cooling labor market as highlighted in the payrolls report.

The Cboe Volatility Index (VIX) measures anticipated S&P 500 volatility, dropping to 14.9 from its October high of nearly 22. This indicates a shift in investor sentiment—from a brief panic to a renewed embrace of the market.

In stark contrast, individual stocks reacting to earnings have shown significant volatility. Companies such as Roku, Shopify, and Palantir Technologies surged by more than 20% post-earnings, while others like Paycom Software, ON Semiconductor, and Estée Lauder plummeted by 19% or more.

While market volatility has reduced, the response to earnings remains highly erratic. On average, companies surpassing earnings and sales expectations have only seen a marginal 0.3% increase in stock value. Conversely, those missing forecasts experienced a notable 4.8% decline—a disparity wider than the historical average.

The issue lies in the fact that although earnings have largely surpassed estimates, the market’s forward-looking nature has already priced in this growth. Spencer Hakimian, Tolou Capital Management’s founder, highlights the risk should anticipated growth not materialize in the years ahead.

Recent instances like ON Semiconductor’s discouraging profit guidance due to weakening automotive chip demand resulted in a 22% stock drop. The trend of cautious forward guidance among companies is a cause for concern and could exacerbate market volatility.

The bond market’s behavior is currently influencing stock markets. Although the 10-year Treasury yield witnessed a significant decline, concerns linger about still-elevated interest rates potentially impeding future earnings in 2024 and 2025, signaling a potentially volatile market ahead.

David Miller, co-founder of Catalyst Capital Advisors, predicts a higher VIX level in the near future. The forecast hints at a bumpier market ride, requiring readiness for potentially increased turbulence.

Leave a Reply