Price In? Why are investors indifferent to strong earnings reports from US stocks?

The U.S. stock market kicked off the second quarter earnings season strongly, with robust consumer momentum driving corporate profits to remain resilient. However, the stock market reacted tepidly, as most positive news had already been priced in, and companies that failed to meet expectations faced severe penalties.

Taking financial stocks as an example, last week's earnings significantly exceeded expectations, but stock performance was lackluster. Streaming platform Netflix also surpassed expectations across all major metrics but closed down over 5%. United Airlines expressed optimism about the growth in travel demand, but investors reacted coldly to these figures.

Greg Taylor, Chief Investment Officer of PenderFund Capital Management, stated:

With stock valuations at current levels, all positive news is now priced into the market.

The S&P 500 index closed near historical highs last Friday, setting 7 new records within 15 trading days. The index currently has a price-to-earnings ratio of 22 times, quickly approaching the levels seen in February, just before the tariffs were announced in April.

Meanwhile, according to Bloomberg data, the market's punishment for underperforming results has reached its most severe level in nearly three years. As Michael Arone, Chief Investment Strategist at State Street, noted:

The current market has very little tolerance for error; when valuations are high and you miss, the punishment will be harsher.

Banking Sector Posts Record Earnings but Stock Prices React Coldly

Large U.S. banks delivered impressive earnings reports based on record trading revenues, with volatility triggered by Trump’s tariffs stimulating market activity among Wall Street's largest firms. Nevertheless, stock price movements were disappointing.

Goldman Sachs set the record for the largest revenue in Wall Street history, but the company's stock price rose less than 1% on the day of the earnings release. Morgan Stanley's net income exceeded expectations, yet its stock fell by 1.3%. JPMorgan's stock traders achieved the best performance in the second quarter, with fixed income trading significantly exceeding expectations, but the stock dropped by 0.7%.

As noted by Bloomberg Intelligence strategists Gina Martin Adams and Michael Casper in a report on Friday:

Financial stocks exceeded second-quarter earnings expectations by 94.4%, but stock prices reacted tepidly as investors had largely anticipated these results.

Consumer Resilience Continues to Support Corporate Performance

In the face of persistently high inflation, rising interest rates, and ongoing uncertainty regarding the new U.S. trade regime, the resilience of American consumers has been a focal point for investors and economists. Earnings reports from airlines to PepsiCo, Netflix, and denim manufacturer Levi Strauss show encouraging early signs.

Delta Air Lines CEO Ed Bastian stated that signs of recovery in the U.S. travel industry are emerging as Trump’s tax cuts and spending plans are approved. PepsiCo's North American business improved, and international markets showed strong growth. Netflix raised its full-year expectations. Levi Strauss indicated that it expects sales growth to exceed the impact of Trump’s tariffs.

Retail sales data released on Thursday provided evidence of this ongoing strength. The Department of Commerce reported that retail purchases, unadjusted for inflation, grew by 0.6% after declining in the previous two months, surpassing nearly all expectations in a Bloomberg economist survey PepsiCo and Delta Air Lines' stock prices have become notable outliers this quarter, surging significantly after strong performances. These two stocks had notably lagged behind the market prior to their earnings announcements this year.

The Importance of Outlook Guidance

With numerous uncertainties still ongoing, such as tariffs, economic growth, inflation, and the Federal Reserve's interest rate cut plans, corporate outlooks will play a crucial role in shaping investor confidence.

Dec Mullarkey, Managing Director of Sun Life Investment Management, stated: "The biggest issue facing S&P 500 earnings is who will foot the tariff bill."

Earnings expectations for the S&P 500 in the second quarter have been significantly revised down this year. As of Friday's close, analysts expect profits to grow by 3.3% year-on-year, down from an initial expectation of 9.5% growth at the beginning of the year.

Irene Tunkel, Chief U.S. Equity Strategist at BCA Research, remarked:

The bar is low, companies may cross it, but that’s not enough. In a high valuation environment, investors want to see strong guidance, and earnings that fall short of expectations will be quickly punished.

This week, investors will learn about the earnings of numerous tech giants, including Alphabet Inc. and Tesla Inc., industrial giant Honeywell, chemical manufacturer Dow Chemical, defense contractor Lockheed Martin, and automotive manufacturer General Motors