By William Watts, MarketWatch
Here’s another reason not to get overly excited about those supposedly stellar second-quarter corporate earnings.
While second-quarter results have easily eclipsed expectations—72% of the 456 S&P 500 /zigman2/quotes/210599714/realtime SPX +0.24% names had topped estimates through last Friday. But they haven’t necessarily been the key driver in the subsequent performance of individual stocks, wrote Laszlo Birinyi, founder of Birinyi Associates, in a note earlier this week.
Earnings estimates are a “critical ingredient” in every market strategist’s recipe book as they dutifully produce an annual market target and estimates for corporate profits, he wrote. But Birinyi said he’s never found earnings to be “especially helpful or indicative.”
As for the current round of results, he found that “more than ever, in our experience, earnings were only one element in the equation and often not the primary one.”
Among his examples, IBM /zigman2/quotes/203856914/composite IBM +0.12% beat for the 11th straight quarter, but revenues were lower along with the stock. Netflix /zigman2/quotes/202353025/composite NFLX +1.31% “just missed” on earnings, but the stock was lifted as investors focused on subscriber growth. Nvidia /zigman2/quotes/200467500/composite NVDA +0.20% beat earnings forecasts and posted a rise in sales. But shares were slammed after disappointing growth in sales of graphics chips designed for data centers, though they subsequently bounced back.
Birinyi took a look at the stocks in the S&P 100 /zigman2/quotes/210600159/delayed OEX +0.22% , eliminated utilities and added some names, including Nvidia and Ralph Lauren /zigman2/quotes/207257694/composite RL -0.06% . Of the 93 firms, 83 beat earnings estimates, but more stocks went down than gained the following day. And only five—Ralph Lauren, Boeing Co. /zigman2/quotes/208579720/composite BA -0.51% , Capital One /zigman2/quotes/204480509/composite COF -2.38% , Caterpillar /zigman2/quotes/203434128/composite CAT +0.26% and AT&T /zigman2/quotes/203165245/composite T +0.14% —gained 5% or more in the immediate wake of the results (see chart below).
And Birinyi Associates notes that of the 83 winners, only 37 had continued higher through Wednesday’s close, and only four names—Lockheed Martin /zigman2/quotes/200691238/composite LMT -1.06% , United Parcel Service /zigman2/quotes/201245396/composite UPS -0.94% , Nvidia, and Bristol-Myers Squibb /zigman2/quotes/202559280/composite BMY +0.33% —have added 5% since reporting day.
The post-earnings performance “makes life more difficult for analysts and managers as forecasting subscriber growth, iPhone sales and management’s attitudes are not usually elements in the process,” Birinyi wrote, adding that it might also suggest that artificial intelligence and so-called robo-investing aren’t solutions.
“We have no easy answers, but identifying the ‘problem’ is at least the first step in the process,” he said.