Amidst Elevated Optimism And Record Margin Debt, Investor Reaction To 4Q Results From Top 6 Companies This Week And Next Telling

Post-earnings stock reaction to the leading US financials has been negative. Ditto with how (INTC) and (IBM) were treated. This week and next, the top six companies report. Amidst elevated investor optimism and surging margin debt, reaction to their results might just be a tell.

The 4Q20 earnings season has just begun. Equity bulls are probably not happy how markets are reacting to the results.

Just before companies began publishing their reports, the sell-side showed conviction by raising numbers in the first two weeks of January. Fourth-quarter operating earnings estimates for S&P 500 (SPX) companies were $36.05 at the end of last year and were revised higher to $36.60 as of the 14th this month. If earnings come in as expected, these companies are on course to ringing up $120.79 in 2020, down from $157.12 in 2019. Expectations have massively built up for this year, with consensus at $165.56 (Chart 1).

From stocks’ perspective, what is more important is what kind of reaction these results elicit from investors. On this score, the 4Q reporting season has been a disappointment so far.

On January 15, JP Morgan (JPM), Wells Fargo (WFC) and Citibank (C) reported. They all sold off and continued lower last week. On the 19th, Goldman Sachs (GS) and Bank of America (BAC) reported and sold off. On the 20th, Morgan Stanley (MS) reported and rallied intraday to a new high but only to reverse and close down.

Similar adverse reaction was noticed last Friday when Intel and IBM each dropped north of nine percent in reaction to Thursday’s earnings. Of the majors, Netflix (NFLX) bucked the trend on Wednesday gapping up nearly 17 percent.

Leading up to this, stocks rallied massively. It is entirely possible the post-earnings reaction is nothing but normal profit-taking.

For instance, from the lows of last March through last Thursday’s new intraday all-time high of 13433.69, the Nasdaq 100 (NDX) shot up 98 percent. That is in 10 months!

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