As we close out the second-quarter earnings season, it’s been one of the strongest in recent memory. According to FactSet, with nearly all S&P 500 companies reporting, 79% have surprised us with better-than-expected earnings, and 60% have delivered positive revenue surprises. The overall earnings growth rate sits at 10.9%, the best we’ve seen since the end of 2021.
But even with all this good news, you might have noticed the market doesn’t always react as expected. Sometimes stocks that miss their targets but share optimistic future plans are rewarded, while others that hit the mark can still see their prices fall. It’s a strange and often frustrating reality of investing.
“Why does a stock sometimes drop when it reports positive earnings?”
It’s a question that’s baffled investors for years. You’ve probably seen it yourself: stocks pulling back even after great earnings reports, while others soar on unexpected news. For instance, Eli Lilly (LLY) jumped 9%, Meta (META) soared nearly 10%, and Target (TGT) climbed 10% after their earnings beats.
Before we break down four common reasons why stocks might fall despite good earnings—and why it’s still crucial to stick with fundamentally solid companies, I wanted to share free resources and 3 secrets that have been game-changers for my own investing strategy—tips that I believe could help you too.
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These resources and secrets have made a big difference in my investing journey, and I wanted to share them because I believe they can help you too. Now, let’s break down four common reasons why stocks might fall despite good earnings—and why it’s still crucial to stick with fundamentally solid companies.
Reason #1: Missing the Mark on Expectations
Take Microsoft (MSFT), for example. On July 30, 2024 at 4:05 PM, they announced strong results with revenue up 15% year-over-year to $64.7 billion. However, their top division, Intelligent Cloud, slightly missed expectations, reporting $28.5 billion in revenue versus the expected $28.7 billion. This minor shortfall was enough to cause a 3% dip in the stock before it eventually bounced back. It was a clear reminder that even strong overall performance can be overshadowed by small misses in key areas.
Reason #2: Disappointing Future Outlook
On August 21, 2024, at 8:30 AM, Macy’s (M) reported earnings that beat expectations, with a profit of $0.53 per share. However, their guidance for the year fell short of what investors had hoped for. This disappointing outlook led to a 13% drop in the stock, highlighting how crucial future guidance is in shaping market reactions, even when current earnings are strong.
Reason #3: Misreading the Results
On August 26, 2024, at 9:00 AM, Alarum Technologies (ALAR) announced earnings that included a larger-than-expected loss. However, they also reported positive operating earnings, signaling underlying financial health that was overlooked by many. Despite these better-than-expected operating numbers, the market focused on the headline loss, leading to a sharp decline in the stock price. This reaction underscores how easily key financial details can be missed amid initial market responses.
Reason #4: Unrealistic Expectations
On August 23, 2024, at 4:10 PM, NVIDIA (NVDA) reported outstanding results, surpassing estimates and raising their future outlook. However, even these impressive numbers couldn’t satisfy investors’ sky-high expectations. The stock dipped slightly, demonstrating the challenge of being priced for perfection, where even strong performance can fall short of the market’s lofty demands, leaving little room for anything less than exceptional.
The Bottom Line
Navigating earnings season can feel like a rollercoaster, especially when stocks don’t react the way you think they should. As Warren Buffett reminds us, “In the short run, the market is a voting machine🗳️, but in the long run, it is a weighing machine⚖️.” In other words, market sentiment 📉📈 can drive short-term moves, but solid fundamentals 🏆📊 win over time.
With the S&P 500’s current P/E ratio of 21.0, above the 5-year and 10-year averages, it’s clear that valuations are high. Staying invested in quality companies that show consistent earnings growth and strong outlooks remains key. Even if the market’s short-term response is disappointing, these companies tend to bounce back and thrive in the long run.
So, while it’s easy to get caught up in the day-to-day market drama, remember: the best stocks will recover and continue to grow, reflecting their true value over time.
Thank you for joining us on this journey. Remember, the best investment you can make is in yourself. Happy investing!
Together, BuildWealthWise
ChuWei
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