It’s Earnings Season, and Investors Expect to Be Impressed

Companies are just a few weeks into “Earnings Season,” and market participants are unimpressed and even disappointed with “as-expected” earnings. As interlinked as the world economies have become, huge multinationals are afflicted with global concerns. What’s more, investors expect to be impressed with current stock prices.

While some companies, like Alphabet (GOOGL) and industrial giant 3M (MMM), have exceeded overall expectations in the past few days, others have fallen short. In all cases, stock valuations are so high that investors are no longer okay with anything short of stellar financial reports. The bar is set pretty high.

Companies With Just Okay Results Get KO’ed

In today’s pricey stock market, a “just okay” earnings report is no longer enough to impress the market. Companies that meet or slightly exceed expectations are still being punished, meaning their stock prices take a hit. This is a sign that investors are demanding more from companies, and anything less than perfection is met with disappointment.

This trend is particularly evident in the tech sector, where companies like Apple (AAPL) and Microsoft (MSFT) have an unsustainable quarterly benchmark for performance. Even slight misses on earnings or revenue guidance have sent stock prices plummeting. The most recent example is Microsoft beating estimates by $.01 and immediately getting slammed in after-hours trading.

The message from investors is clear: Companies need to deliver exceptional results to justify their valuations, or they will face investor dumping.

Consumer Confidence Confounds

Despite a strong economy and low unemployment, consumer confidence in the U.S. and the global market has been surprisingly weak. Recent surveys show that Americans are increasingly pessimistic about their personal finances and the overall economy. A similar trend exists in many other countries, where consumer sentiment is low due to a variety of factors, including inflation, high interest rates, and geopolitical tensions.

In recent months, the Conference Board’s Consumer Confidence Index has been on a downward trend in the U.S. Similar declines have been reported in other major economies, including China, Japan, and several European countries.

This lack of confidence is particularly concerning given the current economic conditions. With U.S. GDP growth and job creation remaining healthy, one would expect consumers to be more optimistic. However, many people feel the pinch of rising prices and worry about the future.

China’s Impact on Global Giants

The global economy is feeling the pinch from China’s economic slowdown. International companies such as McDonald’s (MCD), Visa (V), and Unilever (UL) are some of the stakeholders facing the storm. China’s economy, the second-largest in the world, has been struggling with crushing real estate devaluation and job insecurity, which weighs on Chinese consumer sentiment and spending.

Consumer behavior in China is a significant concern for global companies, as China is a key market for many. In fact, McDonald’s reported its first drop in sales worldwide in 13 quarters, citing weakness in China’s economy. The fast-food giant is just one of many feeling the pain.

Tech on Deck: Possible Bright Spots

As we move through earnings season, a spotlight will be on the stocks responsible for having driven overall market performance, the “Magnificent Seven” and second-tier tech titans. These companies have been driving the market’s performance for years, and their earnings reports could have a significant impact on the overall market sentiment.

Unlike artificial intelligence (AI), the consumer electronics segment of tech is currently delivering on tangible promises. Markets for some products have remained strong; a prime example is Apple’s latest iPhone models, which continue to be in demand. The company’s services business, which includes the App Store and Apple Music, has also been performing well and could continue to drive growth.

However, it’s not all smooth sailing for the tech titans. Competition is fierce, and companies face increasing scrutiny from regulators and lawmakers.

As investors await their earnings reports, they’ll be looking for signs of resilience and adaptability in the face of these challenges. The performance of the tech titans in the coming weeks could set the tone for the rest of the market; it makes these weeks a crucial period for investors.

Investor Takeaway

As earnings season unfolds, the market sends a clear message: “Just okay” earnings are no longer enough. We’ve seen that companies that meet or slightly exceed expectations are being punished, with their stock prices taking a hit. Consumer confidence remains weak globally, with various factors contributing to the malaise.

The slowdown in China’s economy also weighs on global companies, which rely on the country as a key market. As we await the earnings reports of the rest of the tech titans, investors will look for signs of resilience and adaptability in the face of challenges. The performance of these companies could set the tone for the rest of the market, making this a crucial period for all investors.