By Al Root
Over the long-term, the stock market is very good at valuing companies. Over the short run, not so much.
Not every stock price reaction to recent earnings reports seems fair. Some companies have been punished for pristine results. That can be an opportunity for investors.
Through midday trading on Monday, more than 500 companies in the Russel 1000 had reported quarterly results. Things are going well, with 80% of companies beating Wall Street estimates by an average of 20%. Earnings growth has been an impressive 27%.
That performance has landed with a thud. The average stock move after earnings is a whopping 0.1% gain. Last quarter, Russell stocks gained an average of 0.5% for 10% earnings growth.
The reason for the lackluster performance isn't hard to suss out. Investors are nervous about high oil prices, geopolitical tensions, pesky inflation, interest rates, and just about everything else.
Still, not every stock price reaction feels justified. Seaport analyst Patrick Palfrey tracks stock price moves that are "out of sync" with underlying fundamentals. For a stock to have been unjustifiably punished, it must have seen improving earnings estimates over the past three months and a lagging stock price.
For starters, there is Netflix. Its stock dropped almost 10% after its first-quarter earnings, but Wall Street's full-year 2026 earnings estimates have risen to $3.57 from $3.31 since then. Investors might be worried about second-quarter revenue and the departure of founder and chairman Reed Hastings, but the overall outlook marched higher.
That setup repeated itself in several areas. In leisure and travel, Expedia and Las Vegas Sands both declined after big earnings beats, which generated higher full-year earnings estimates from the Street.
In financials, the same things happened to JPMorgan Chase & Co., American Express, and Mastercard.
Many solid aerospace and defense earnings landed with a thud, with investors worried about the sector outlook amid rising energy prices. But 2026 earnings estimates for GE Aerospace and RTX rose after they reported first-quarter numbers.
Aerospace investors can be glad they weren't in software stocks. The sector continues to be hammered by fears that AI tools will take market share of the enterprise software market. ServiceNow was the poster child for the problem. Shares dropped almost 18% after its quarterly earnings report. That might be considered unfairly punished since full-year 2026 earnings estimates are down only four cents, or about 1%, since earnings.
Among the Magnificent Seven, Microsoft and Meta Platforms were unfairly punished. Those two dropped almost 4% and 9% after reporting quarterly results. Investors might be worried about AI spending, but analysts took their annual earnings estimates up after the quarter.
Shares of Dow, Inc. and ConocoPhillips qualify as unfairly punished, but those two are at the mercy of oil prices. Coming into the week, Dow stock was up 31% since fighting began in Iran. Conoco stock was up 9%.
The dozen stocks listed, excluding ServiceNow, which doesn't have rising estimates, dropped an average of about 5% after posting an average earnings beat of 23%.
That's quite a spread, and maybe an opportunity for investors.
(The most punished was Netflix with a 62% quarterly earnings beat and a 10% drop for a spread of about 72 points.)
Of course, as always, a screen is only the start of an investment process. After identifying ideas, comes the harder work of figuring out what's next for each stock.
Write to Al Root at allen.root@dowjones.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
May 04, 2026 15:38 ET (19:38 GMT)
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