- We saw volatility spike last week as markets faced a broad sell-off amid escalating tensions surrounding North Korea.1 However, even this extraordinary geopolitical situation caused only a brief sell-off before equity markets recovered much of last week’s losses in the first half of this week.2
- Though equity markets have generally continued to move upward in 2017, one potential cautionary note has emerged in recent weeks. Specifically, this earnings season investors are no longer rewarding companies right after they announce a positive earnings surprise.3
- As the chart highlights, immediately after companies in the S&P 500 reported a positive earnings surprise for the second quarter of 2017, the company’s stock price decreased 0.3% on average from the two days before the company reported results.3
- This 30 basis point decline is well below the 5-year average increase of 1.4% that a company’s stock price has experienced after reporting a positive earnings surprise.3
- Although it can be a dangerous practice to read too much into stocks’ short-term price swings, one explanation for the change could simply be that in today’s market, investors have become harder to impress. Heightened equity valuations today suggest there may be a limit to how high equity markets can continue to rise.
1 Chicago Board Options Exchange, http://bit.ly/2ncqQ9l.
2 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
3 Fact Set, S&P 500 Companies See Worst Price Reaction to Positive EPS Surprises since Q2 2011, http://bit.ly/2x8a4Mq.
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