Wall Street Turns Mr. Grumpy Pants on Earnings

(Bloomberg Opinion) -- Wall Street has not been dealing well with disappointment recently.

Consider Facebook Inc. The social media company lost $119 billion in market cap last Thursday — the biggest one-day stock loss in history — after the company reported its revenue rose 42 percent in the second quarter. Analysts were expecting 43 percent. Earnings came in less than expected as well. But it's not only Facebook that is getting Wall Street's icy shoulder.

Shares of companies that have reported worse-than-expected revenue and earnings this earnings season have fallen an average of 3.6 percent on the next trading day, according to Bank of America Merrill Lynch. That's far more than usual. The typical one-day drop for disappointers has been 2.4 percent going back to the beginning of 2000. It's also significantly more than last quarter, when shares of companies that missed dropped an average of just 1.4 percent.

The particularly harsh treatment could be the flip side of the fact that earnings have been extremely good for the second quarter, which means the poor performers are standing out. Through Friday, about half of the companies in the S&P 500 Index have reported their second-quarter earnings, and 83 percent of them have been better than expected, according to market data firm FactSet. While Wall Street analysts helpfully tip the scales in companies' favor — it's part of the game — the number is even higher than usual. Overall, earnings of S&P 500 companies are expected to have risen 21.4 percent in second three months of 2018, compared with the same period a year earlier.

It's also likely another sign that expectations and stock valuations — pumped up last year — remain too high, even after this year's rocky market. About this time a year ago, investors seemingly stopped throwing surprise parties, no longer rewarding companies with big pops after earnings beats. Investors came to expect the surprises. Now they appear to have become more shocked by the disappointments.

And, Facebook aside, that's particularly true for the companies that are tied to the economy. Consumer stocks are suffering the most recently after missing estimates, perhaps because it is perceived that they should be getting a boost from tax cuts and low unemployment.

All told, it's not a great sign for the market. Next year, earnings growth is supposed to shrink to something more like 10 percent. Investors are already getting the jitters. If companies aren't able to keep up with those lower expectations, the disappointment is only likely to grow.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.