Earlier this week, BofAML’s Savita Subramanian revealed a troubling trend behind what has otherwise been a decent earnings season in the U.S.
“Companies which missed on EPS and sales have been summarily punished — negative 3ppt alpha versus the S&P over the subsequent one and five days, more than the historical avg. underperformance of 2ppt,” Subramanian wrote, before noting with more than a little alarm, that “companies which beat on top and bottom line have produced no alpha over the next one and five days.”
In other words, simultaneous top and bottom line beats are not being rewarded by the market. Here’s the chart which shows that this hasn’t happened since the tech bubble:
Well, for those interested, Goldman is out reiterating that point in their weekly U.S. Kickstart piece.
Although the S&P 500 rose by 1% during the three main weeks of the earnings season, investors did not reward firms that beat expectations in 2Q.
Since 2006, the median company that surpassed consensus earnings expectations outperformed the S&P 500 by 114 bp the day after reporting. However, in 2Q, the median company’s excess return relative to the S&P 500 was just 3 bp, the lowest level on record.
Nonetheless, the one-day price responses to earnings results were relatively well-ordered. Firms posting positive EPS and sales surprises performed relatively better than companies reporting in line results or negative surprises (see Exhibit 3).
So while Subramanian noted that companies which beat on both the top and bottom line have produced zero alpha the following day for the first time since 2000, Goldman wants you to know that if you isolate for EPS surprises (i.e. only bottom line beats), this is the first time in history that those upside surprises have been rewarded with (basically) no outperformance.
Looking for a reason to think this rally is out of gas? There’s one.