A key short-term boost for stocks has vanished for the first time in 17 years

pulse

July 31, 2017 3:52 PM

There are no short-term rewards for stocks that beat on earnings, Bank of America Merrill Lynch says.

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Traders have not been this unresponsive to earnings announcements in nearly two decades.

The rate of earnings beats in the second quarter is above its five-year average, at 73% of S&P 500 companies that reported through Friday according to FactSet. Corporate America is also giving less negative guidance about the third quarter than usual.

And so, earnings surprises are not that surprising. Combined with low inflation and sluggish changes to interest rates, earnings growth was a pillar of the bullish thesis for stocks that drove the market to new highs.

Chris Harvey, a senior analyst at Wells Fargo, found that large caps are bearing the brunt of Wall Street's muted reaction to earnings outperformance. Post-earnings release, large-cap companies that beat on EPS have underperformed the S&P 500 by -0.32%. But similar companies on the small-cap Russell 2000 index have outperformed the market by 1.77%.

"We believe the relative outperformance by large caps has raised the bar too high and is likely contributing to the 'sell the news' dynamic as compared to smaller caps," Harvey wrote in a note on Monday.

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