By several measures, U.S. investors are being treated to one of the best sets of corporate results since the financial crisis. You wouldn’t know it from the stock market. It’s the first quarter in eight that S&P 500 Index profits will rise fast enough to pronounce an end to the earnings recession. Not only is income up more than 4 percent, so are sales, rising at the second-fastest clip since 2012. Earnings forecasts are in particularly good shape, with the tally of companies raising them outnumbering those that cut by the most since 2011 at this time of the year.
Yet for all that, equities have gone limp. Data from Bank of America Corp. show that companies whose top- and bottom-line results beat analyst predictions gained less than 1 percent the next day, less than half the average since 2000. The S&P 500 itself it locked in a streak of day-to-day motionlessness not seen in a decade, and its overall return is only half the average since 2012.
What’s going on? One argument says earnings are taking a back seat to geopolitical concern in the era of Donald Trump. A simpler one may be that investors got ahead of themselves celebrating this year’s results early during the stretch known as the Trump Rally.
“Companies that have beaten expectations haven’t been rewarded as much as usual, at least so far this earnings season,” said Dan Suzuki, senior equity strategist at Bank of America’s Merrill Lynch unit. This is likely to due to investors focusing more on the forward-looking macro risks, from tax and trade policy to stimulus and global growth, rather than what companies were seeing in the fourth quarter of last year.
The rally leading into earnings season was large — 6 percent for the S&P 500 in the three months before Alcoa Corp. reported on Jan. 24, or more than three times the average since 2006. Now, with reporting season in full swing, trading has fallen off the table. Average daily U.S. stock volume one month in is the second-lowest since 2015
While thin trading can lead to increased volatility, that isn’t happening either. The S&P 500 that’s gone 82 days without a down move of 1 percent, the longest such streak since 2006, Bloomberg data show. Meanwhile, a gauge of stock market anxiety sits close to its lowest level in 2 1/2 years.
One silver lining: because stocks haven’t gone anywhere, the results are lowering valuations. The forward 12-month price-earnings ratio for the benchmark now sits at 17.6 times, down from an average of 18.4 times over the last three months of 2016, according to Bloomberg data.