By Al Root

Earnings season is in full swing, bringing with it the potential for big gains -- or potentially crushing losses. When trying to gauge the risk/reward, pay attention to the starting point, particularly right now.

Experienced traders know that a beat isn't always a beat, nor a miss a miss. On Thursday, for instance, American Airlines Group slumped 9.6%, IBM dropped 7.7%, and Honeywell International fell 6.2% -- all of them after reporting earnings that topped expectations. All three had posted double-digit gains over the previous three months. Conversely, Raymond James Financial rose 3.7% and CenterPoint Energy rose 1.9%, despite reporting profits that fell short.

There's a lesson in there for investors. Stocks that have gained too much are more susceptible to big drops than companies that dropped heading into their results. "We like stocks that are relatively oversold coming into earnings," says Fairlead Strategies founder Katie Stockton. "They theoretically have a lower bar set in price terms as investors absorb the earnings data."

"Oversold" is a technical term that essentially means stocks have gone down a lot, quickly, reflecting that bad news has at least partially been discounted in share prices. Investors don't have to do a lot of complex math to figure out what to watch out for, though. Stockton recommends looking at shares that have underperformed the S&P 500 since the April lows, reached just after President Donald Trump's Liberation Day tariff announcements.

Six stocks reporting this coming week that fit the bill include communications infrastructure provider American Tower REIT, Visa, Procter & Gamble, Merck, Oreo maker Mondelez International, and drugstore chain CVS Health, according to Fairlead's analysis.

Coming into Thursday trading, those six were up an average of just 3% from April lows, about 22 percentage points behind the S&P 500. That's the set up for a potential post-earnings bump.

Those calls are based on the charts -- that is, technical analysis -- but fundamentally minded analysts like those stocks too. The average Buy rating ratio for the six is about 72%, according to FactSet, well above the 55% average for stocks in the S&P 500.

Overbought stocks, however, have a higher bar to clear when they report earnings this coming week. Fairlead's list includes a who's who of market dominance -- Amazon.com, Meta Platforms, and Microsoft -- as well as Boeing, cruise operator Royal Caribbean Group, and disk-drive maker Seagate Technology Holdings.

Again, there is nothing wrong with those six. Shares have simply been on fire, up 66% on average since the April lows. Performance like that means it will take a pretty darn good earnings report to send stocks up further. That's not out of the question -- GE Vernova, for instance, surged almost 15% on Wednesday after earnings despite having gained more than 90% since the April lows. And the six stocks on the overbought list are all Wall Street darlings -- the Buy-rating ratio for Meta, Microsoft, and Amazon is close to 90%.

Still, it always pays to know where you started.

Write to Al Root at allen.root@dowjones.com

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(END) Dow Jones Newswires

July 25, 2025 21:30 ET (01:30 GMT)

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