One week ago, Morgan Stanley issued a report looking at the size of moves across all asset classes in the environment of declining market liquidity, and found that "It's not your imagination, large moves are becoming more common in the market."
Today, in what appears to be a follow up from Goldman Sachs, the bank uses Morgan Stanley's verbiage almost verbatim and writes that "No - it’s not your imagination - earnings day moves are getting bigger."
As Goldman writes, there has been a lot of focus on US stock moves this earnings season (with FB, TWTR and NLSN all down >20% in the past week), but the bank points out that this is not an isolated phenomenon, and the wide moves post earnings are observed across most companies.
In a note by derivatives strategist John Marshall, earnings day moves have continued their trend of increasing so far this quarter, and the first-day reactions in single stocks to quarterly results have been exceptionally pronounced: at an average 3.9%, up-or-down swings for the 252 S&P 500 stocks that have reported so far, are up from an absolute average move of 3.2% in the last eight quarters, and 3.3% in the last four.
In fact, as shown in the charts below, post-earnings moves for Q2 reporters have hit the greatest absolute amplitude on record, and more than 50% higher than the long-term average of 2.4% over the past 15yrs and reflects both the low level of market-wide volatility in recent months (implying low non-earnings day moves) and an increase in the magnitude of moves on results - so far this earnings season absolute moves have been 4.1% on average
"This is a sign that the strong economic environment and accelerating inflation trends has reduced the earnings visibility for company management teams and covering analysts" Marshall writes, and adds that "this increases the instance of surprises and drives larger stock moves."
Another factor behind the confusion is that, according to Bloomberg, "while U.S. GDP expanded at the fastest rate in four years in the second quarter, the risk of a global trade war and a Chinese slowdown was also building."
In a separate Goldman note, the bank notes that while tech stocks have seen the biggest declines on earnings, despite solid beats...
... -some of the biggest earnings season gainers have been Value stocks, rebounding after prolonged underperformance.
Goldman also notes that its Value factor just had its best L-S weekly performance since March, and adds that "whilst some of the rebound maybe due to macro drivers, it seems that earnings relief may be an additional factor driving some of the more unloved Value stocks."
Are earnings reactions just another manifestation of the growth-to-value rotation we discussed recently, where the market is increasingly disenchanted with the former, and increasingly looking toward the latter?
Curiously, these record kneejerk reactions to earnings come at a time when a record number of companies are beating estimates. Last week we noted that according to Factset calculations, some 83% of reporters have beet earnings expectations.
Is the market's response an indication that it's all downhill from here, especially with growing rumors of a recession either in 2020, or even 2019?
A final curiosity: while stock reactions have been volatile and sharp in both directions, Goldman calculates that they have, ironically, canceled each other out, and on average, shares of S&P 500 companies have risen just 0.5% a day after reporting, with 55% of the 252 S&P companies that have reported this quarter, trading higher.
The Industrials sector has seen the most positive earnings-day moves on average at +2.1% and the Real Estate sector has seen the most negative at down -0.3%. The biggest up-moves were from AMD (+14%), HAS (+13%) and FLIR (+12%) while the biggest down-moves were from NLSN (-25%), TWTR (-21%) and FB (-19%)...
... in other words, tech stocks suffered the biggest declines, as traders increasingly look to tiptoe out of "growth."