By Lewis Krauskopf
NEW YORK (Reuters) – Richly valued U.S. stocks are leaving investors with little tolerance for disappointment, raising the stakes ahead of a week in which two more tech and growth giants are set to report.
Strong reports from Microsoft (NASDAQ:) and Google parent Alphabet (NASDAQ:) helped post the biggest weekly gain since early November on Thursday, following the first 5% decline of the year. The S&P 500 is up about 7% in 2024 and up about 24% since the end of October.
But investors punished a disappointing forecast from Meta Platforms (NASDAQ:). Shares of the Facebook parent company fell more than 10% on Thursday after the report. A sell warning saw shares of the industrial sector Caterpillar (NYSE:) down 7%.
More broadly, S&P 500 companies that beat analysts’ earnings expectations this quarter saw their stocks outperform by an average of just 0.2%, JPMorgan strategists said. In contrast, stocks that missed earnings estimates have lost an average of 4%, the biggest underperformance in at least eight years.
Earnings reports were “pretty good,” said Rick Meckler, partner at Cherry Lane Investments. But “anyone who is missed in any way pays a pretty high price.”
More gains are in store in the coming week from the so-called Magnificent Seven group of companies that pushed markets higher last year. Amazon (NASDAQ:) reports on Tuesday and Apple (NASDAQ:) on Thursday. On Wednesday, the Federal Reserve will release its final monetary policy statement after its two-day meeting.
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Some believe that the market’s near-unabated rise over the past six months has made investors less forgiving of earnings declines. According to LSEG Datastream, the S&P 500 is trading at 20 times forward earnings estimates, well above the historical average of 15.7.
“We cautioned that potential earnings numbers may not lead to a rise in stock prices during earnings season, given already strong stock prices heading into earnings season and longer-term positioning…” JPMorgan strategists said. “Indeed, US stock market reactions have been disappointing so far.”
Shares of Tesla (NASDAQ:) rose 12% earlier this week after the company announced it would introduce new models in early 2025. Some investors attributed that to bargain hunting after a painful sell-off this year, which set the bar for good news much lower. . Tesla shares remain down more than 30% this year.
Rising government bond yields could be another factor. Companies’ expected future profits are more heavily discounted in analysts’ models when bond yields rise, because investors can now get a higher reward from risk-free government bonds. The benchmark reached 4.74% this week, its highest level since early November, after more evidence of stronger-than-expected inflation.
Overall, though, 78% of S&P 500 companies beat analysts’ first-quarter earnings estimates, with profits on track for a 5.6% increase from a year earlier, LSEG IBES said Friday .
Solid corporate results have become more important as rising Treasury yields and persistent inflation have increased uncertainty about stocks, said Chuck Carlson, CEO of Horizon Investment Services.
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Corporate earnings “are coming through at a level that can provide support to the market and overcome some of the shakiness in the inflation and interest rate environment here,” Carlson said.
Gains could take a back seat if bond yields continue to rise or inflation rates remain stronger than expected. While investors don’t expect interest rate action from the Fed at next week’s meeting, they will be listening to the central bank’s insights on recent evidence of stronger-than-expected inflation.
Expectations for rate cuts, which had been a key driver of the rally, have faded amid signs of economic strength and persistent inflation. Futures markets showed on Friday that investors had priced in just 35 basis points in rate cuts through 2024, down from more than 150 basis points in January.
The gains were “positive, but what the market is more concerned about, I would say, is inflation and what the Fed is going to do about it,” said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute.
(This story has been corrected to say that 10-year Treasury yields hit 4.74% this week, not 5.74%, in paragraph 10)
