Investors Unimpressed by Strong Earnings as Market Seeks Perfection

The second-quarter earnings season is underway, with companies across various industries reporting strong results that, on paper, should be driving market enthusiasm. However, investors remain unimpressed, with the stock market showing little reaction to these positive reports. Despite impressive performances in banking, tech, consumer goods, and travel, the market is only rallying for exceptional results, punishing anything short of perfection.

This trend is evident in the financial sector, where major banks like Goldman Sachs, Morgan Stanley, and JPMorgan Chase reported record-breaking earnings. Goldman Sachs achieved the highest equity trading revenue in history, Morgan Stanley exceeded net revenue forecasts, and JPMorgan Chase had its best second quarter for stock trading ever. Despite these achievements, the market response was muted, with shares barely moving or even declining slightly. Analysts noted that while financials have exceeded second-quarter earnings expectations, the market had already anticipated these results, leading to a lackluster reaction.

This pattern is not limited to the financial sector. Companies like Netflix and United Airlines, which reported strong earnings and optimistic outlooks, saw their shares decline. Investors are now seeking exceptional and forward-looking results, rather than merely good performance. With stock valuations at record highs, all positive news is already priced into the market, leaving little room for further gains. The market is showing no mercy to companies that miss expectations, with the gap between the treatment of misses versus beats being the largest in nearly three years. High valuations mean that any shortfall is met with severe punishment.

Even companies that meet both profit and revenue expectations are receiving lukewarm responses. The only notable winners in terms of share price this quarter were PepsiCo and Delta Air Lines, both of which had been underperforming before their reports. Their stronger-than-expected numbers finally pushed their shares higher. Most other companies, however, did not fare as well. There is also a lack of optimism about broad stock market movement, with good earnings not likely to be the catalyst investors are waiting for.

Consumer spending remains robust across sectors, which is the primary reason earnings have not been worse. Companies from PepsiCo to Levi Strauss, Delta, and Netflix all reported strong demand, indicating that people are still spending despite high inflation and interest rates. Retail numbers released recently supported this trend, showing a 0.6% increase in retail purchases last month, beating nearly every forecast. However, this consumer strength is not translating into investor excitement. The upcoming earnings calendar includes heavyweight names, and with expectations already high, the risk of being punished for less-than-spectacular results is rising. Analysts had already slashed earnings growth expectations for the S&P 500 before the quarter even started, from 9.5% in January to 3.3% by the end of the quarter. This sets a challenging stage for companies to meet or exceed expectations moving forward.