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When Earnings Disappoint In A Market Priced For Perfection

by John Rubino on April 16, 2014 · 2 comments

After today’s market close there was a flurry of earnings announcements, some of which were way low. Not bad, mind you. In fact they were pretty good. But because Wall Street analysts were expecting more in order to justify current stock prices, the disappointments led to big price declines in the aftermarket:

Google shares fall on earnings miss; IBM’s on revenue miss

SAN FRANCISCO (MarketWatch) — Google Inc. shares fell in the extended session Wednesday after the company’s quarterly earnings disappointed, while International Business Machines Corp. shares declined on a revenue miss.

Google Class A shares declined 6% to $529.84 while Class C shares dropped 6% to $523.50 after the Internet giant’s first-quarter profit rose, but fell short of Wall Street estimates. Trading volume was moderate for both classes of stock.

Analysts expected Google to report adjusted first-quarter earnings of $6.36 per Class A share on revenue of $12.41 billion, according to analysts surveyed by FactSet.

IBM shares fell 3.8% to $189 on heavier volume after the tech bellwether’s quarterly revenue fell short of Wall Street estimates and earnings were in-line.

IBM had been forecast to report first-quarter earnings of $2.54 a share on revenue of $22.93 billion.

American Express Co. shares declined 1% to $86.55 on moderate volume after the Dow component’s quarterly revenue fell short of Street estimates of $8.35 billion.

Is this a sign of things to come? Almost certainly. Because US equities are now at record levels, anything less than perfection is considered a reason to sell. And in a world where China is slowing down, Japan just enacted a commerce-killing sales tax increase and the US is barely growing, huge increases in sales or earnings by one giant multinational necessarily come at the expense of its competitors. So someone has to disappoint, and the increasingly-skittish market is going to overreact to the news.

The companies profiled in the above article, for instance, are generally having pretty good years. Google’s revenues were up 19%, or about $2 billion year-over-year, which is nothing short of amazing for a company that size. IBM was down a bit year-over-year but is still huge and highly profitable. Yet both companies’ stocks are getting whacked.

This is neither unusual nor unexpected. It’s just how things work at market tops. And based on how things went the last couple of times valuations reached this level, the stress (or fun, if you’re a short seller) is just beginning.

{ 2 comments… read them below or add one }

The-Shadow-knows April 17, 2014 at 12:21 am

People need to get a good whack the side of the head before they see what is, versus what they want to see. Call it the “emperor has no clothes”, ” the wizard of Oz syndrome” or my personal view, ” taking the red pill to see the Matrix for what it is”, that whack is coming, and when it hits, look out.

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Bruce C April 17, 2014 at 3:56 am

Everything is so complex today that few, if any, people – real “investors” can act intelligently any more. IBM says that within a few years the amount of human knowledge will double every 12 HOURS (that’s an anecdote, so I have no source.)

Nevertheless, I think it’s obvious that most technical and timely information has to be either “dumbed down” or summarized which can mask a lot of critical details.

For example, the recent stat on retail sales does not reveal that most of the sales are due to foreign buyers – Canadians and Europeans in particular – so it does not necessarily indicate domestic US strength as advertised.

There are probably innumerable other similar examples, and they will ultimately manifest in the stock prices.

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