This is a big week for earnings announcements. Of the 500 stocks in the S&P 500 index, 164 of them report earnings this week. If they follow the path set by the companies that have already reported, then the results should be outstanding.
Indeed, 80% of the companies that have posted earnings results so far have beaten analysts’ expectations.
That’s great news. But, it hasn’t always led to great action in the stock prices.
In fact, this earnings season is becoming a “sell on the news” event. One by one, market leading stocks that have ramped higher over the past several weeks have pulled back – hard – following their earnings reports.
Look at this action in Netflix (NFLX)…
NFLX reported earnings on July 17. Heading into the report, the stock was trading near $1,280 per share – up about 50% from its April low.
Netflix crushed the numbers. The company beat expectations for earnings and revenue, and it raised its guidance for the rest of the year.
But, the stock fell following the report.
Investors bought the stock in anticipation of good numbers. The stock rallied ahead of time – effectively discounting good results. Then, once the good results were out, investors sold on the news.
Several weeks of gains went “poof” overnight. NFLX is trading back down to where it was in mid-May.
Investors in IBM have a similar story…
Just like NFLX, shares of IBM came into earnings season showing big gains off the April low. And, just like NFLX, IBM reported fantastic results.
Yet the stock sold off hard following the report. Investors had already discounted good news. And, once the news was out, they sold the stock.
We saw the same action in American Express (AXP).
Ditto for Texas Instruments (TXN), and for most of the stocks that have reported results so far this season. The stocks rallied ahead of the report, then they sold off once the news was out.
Keep this in mind if you’re holding stocks in anticipation of a post-earnings rally. For this earnings season, it may make more sense to take profits on the high-fliers ahead of the reports rather than holding through the announcements.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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