Stocktake: Volatile earnings driving wild market swings

The current earnings season has been characterised by unusually abrupt swings in sentiment. Netflix's January report catalysed market panic, but investors breathed a sigh of relief as Apple and Alphabet surpassed expectations.

Relief turned to panic once more following Facebook's report, only for Amazon to promptly ride to the rescue.

Unsurprisingly, both bulls and bears can cite earnings data for their purpose. Analysts decreased S&P 500 estimates in January for the first time since the second quarter of 2020. Bearish? Maybe not – 2021's earnings upswing was atypical, with analysts usually reducing earnings estimates during the first month of a quarter. Indeed, January's decrease was smaller than the five-, 10- and 15-year average, notes FactSet's John Butters.

This looks like another strong earnings season, says Morgan Stanley’s Lisa Shalett, with profit margins hitting all-time highs and now well above pre-pandemic levels.

Stocktake: Have stock markets bottomed?

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Stocktake: ‘Merciless’ markets hammer Netflix and other growth stocks

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Stocktake: Is this a routine correction or the start of a bear market?

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Stocktake: More market volatility ahead

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However, corporate profitability forecasts are “becoming less upbeat”, she adds. The rate and degree of earnings surprises have returned to long-term norms, major tech companies have begun to miss estimates, and company guidance is “getting hazy”.

What is clear is that investors’ mood is cautious. Companies beating both earnings and sales expectations were rewarded with a “minuscule” one-day gain of just 0.15 per cent, notes Bespoke Investment. Aside from some exceptions, investors have “simply not been willing to reward” companies posting strong results.