Wall Street is getting harsher on companies whose earnings come in below analyst expectations.
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The market is getting 'more discriminating' during earnings season
The market has become more discriminating during earnings season.
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This could be rewarding for active fund managers who seek out stocks that may sell off sharply if their results don't match up to their company's guidance or to analysts' expectations.
"The market has become more discriminating during earnings season, which is a positive for stock pickers," Chris Harvey, a senior analyst at Wells Fargo, said in a note on Sunday. "This suggests that stock pickers may want to spend more time on what they want to avoid or sell rather than what they would like to overweight or buy."
Shares of companies that miss on earnings are being sold more aggressively:
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And over the past three years, the gap between the one-day rallies and sell-offs after earnings has widened as companies that miss are sold off more aggressively:
The stakes are as high as ever for second-quarter earnings, which kicked off late last week. It's especially important for the tech and financial sectors to impress Wall Street, having led the market's climb to new highs and enriched various gauges of its valuation.
Amid the rise of passive strategies, investors need to be smarter about which stocks they bet on or against, said Dmitry Balyasny, the managing partner at the billion-dollar hedge fund Balyasny Asset Management.
"Day-to-day action is very ETF-driven," Balyasny said in a letter to investors obtained by Business Insider. "While this action won't change the ultimate valuation of individual companies, it will increase short-term correlations ... This makes catalysts, earnings, and other events extremely important to play — and play correctly — because that is when dispersion is most likely to occur."
Earnings beats are outperforming misses so far, according to Wells Fargo. Shares of companies that beat have outperformed the S&P 500 by 0.52%, while misses have underperformed by 1.81%.
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JPMorgan, Citigroup, and Wells Fargo all fell on Friday despite beating earnings expectations, reflecting some concern that their postelection surge may be followed by modest revenue growth.
Netflix on Monday is set to be the first big tech company to announce second-quarter earnings.
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