By Martin Baccardax
Investors are dumping stocks in companies that don't meet profit forecasts or offer positive financial guidance more aggressively than usual, potentially indicating worry over slowing growth and renewed inflation.
The difference between how the market is reacting to companies that top Wall Street earnings forecasts compared with those that miss them, in fact, has widened to the most in nearly three years, according to calculations from Bank of America. It is happening even as markets continue to reach record highs.
With 40% of the S&P 500 reporting June quarter earnings as of the end of last week, analysts led by U.S. equity strategist Savita Subramanian say that the majority of reports have been solid. Around 72% are beating profit forecasts, and 77% have turned in higher revenue than Wall Street expected.
An impressive 60%, in fact, have done both. That is well ahead of the historical average of 45% for the second week of earnings season.
LSEG data suggest collective second-quarter profits for the S&P 500 are forecast to rise 7.7% from the same period last year to around $538 billion. That compares with the 5.7% increase forecast at the start of the reporting period.
Stocks that have beaten both top- and bottom-line estimates rose by an average of 1.9 percentage points more than the S&P 500 on the next trading day. That compares to an average gain of around 0.4 percentage point when first-quarter results came in, and the longer-term average of 1.5 percentage points.
"Although beats are seeing a solid boost, above-consensus guidance is getting the biggest reward (+3 percentage points), which is similar to last quarter," said BofA's Subramanian.
For those companies that have missed Wall Street's forecasts, however, the market reaction has been stark. For stocks missing both forecasts, the decline has been around 4.7 percentage points, nearly twice the historical average of 2.5 percentage points.
That puts what Bank of America calls the "beats-to-misses spread" at the highest level since the third quarter of 2022. Subramanian described a spread that wide as "a good backdrop for stock pickers."
While the market's benchmark volatility gauge, the Cboe Group's VIX index, is near the lowest levels of the year, Jason Pride and Michael Reynolds of Glenmede are expecting "pockets" of disruption from this week's heavy slate of earnings and economic data.
"Options market pricing currently reflects expectations for this modest increase in volatility in August from relatively subdued levels in July, " the pair wrote in an update published Monday.
"With tariffs back in focus, guidance and commentary will be just as important as the earnings reports themselves," the Glenmede team said. "Investors should listen closely for how companies are digesting the impact of tariffs and/or adjusting their business models."
Megacap tech earnings will have to do a lot of heavy lifting for the market this week. The S&P500's Information Technology sector, which includes Apple, Microsoft, and Nvidia, will generate around a fifth of all the benchmark's $538 billion in profits, according to LSEG data. Adding in the Communications Services sector, which includes Meta Platforms and Alphabet, takes that tally to around 34%.
Investors are braced for updates from four of the so-called Magnificent Seven tech stocks: Apple, Amazon.com, Meta Platforms, and Microsoft. Collectively, they comprise around $11.3 trillion, or just over a fifth, of the total market value of the S&P 500.
Alphabet, Google's parent, set what Subramanian at Bank of America called a "positive tone" for the cohort last week, raising its full-year forecast for capital spending to around $85 billion. She noted that capex totals, which include billions of dollars of purchases for semiconductors, also include things such as energy supplies and the physical buildout of data centers.
That spending ultimately finds its way into sectors such as construction, utilities, and commodities. Still, questions over how companies will make money from those investments, how fast artificial intelligence is being adopted, the impact of potential tariffs on semiconductors, and trade talks with China continue to linger.
"Microsoft, Amazon, and Meta are all strong players with lots on the AI line, and investors will be looking for continued growth there, as well as from their traditional businesses," said Mark Malek, chief investment officer at Siebert Financial. Apple will be on the defensive because of its lack of progress with artificial intelligence, he said.
"This week isn't technically the midpoint of summer in the Northern Hemisphere, but it may as well be, because it will be the hottest of the year--in terms of market-moving information," he said. "Buckle up, folks, this week is the market inflection point of the year."
Write to Martin Baccardax at martin.baccardax@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
July 28, 2025 16:45 ET (20:45 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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