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Quarterly earnings season returned today when JPMorgan (JPM), Bank of New York Mellon (BK), and Delta (DAL) reported results this morning. It is far too early to draw conclusions, especially when only three S&P 500 (SPX) members have so far come forward, but while all of them posted EPS that beat estimates, two out of three are trading modestly lower.It has been our contention for some time that while EPS beats are a necessary condition for a post-earnings rally, they are no longer sufficient. Guidance matters more.

Think about it this way.The stock market is a discounting mechanism, with stock prices reflecting companies’ future prospects.Quarterly earnings tell us about the near-past and maybe the present.Guidance, whether offered in the published report or during the conference call, tells us about the future. 

So, even though DAL reported 4Q EPS of $1.55, ahead of the $1.53 consensus estimate, they gave guidance for 2026 of $6.50 – $7.50.The midpoint of that estimate was below the prior annual consensus of $7.20, and thus, the shares fell about -3%. 

JPM also beat, reporting $5.23 (excluding items) for the fourth quarter, well above the $4.92 estimate.Their guidance was fine too, projecting 2026 net interest income of about $103 billion, above the $100.3 billion estimate.Yet that stock is also about -3% lower.It’s not quite clear what has turned a knee-jerk 2% pre-market rally into a noticeable decline – perhaps it was a shortfall in investment banking fees, or maybe investors simply didn’t appreciate CEO Jamie Dimon’s comments about risks that might be facing the bank and the economy.

Yet the reaction in JPM points out the other main risk facing investors this season – expectations are running high this quarter.It is quite notable that we have seen a paucity of pre-announcements in recent weeks.It is fairly typical to see at least some companies warn of the potential for profit or revenue shortfalls.Ahead of this quarter’s results, I can’t recall seeing any.And that could pose a problem. 

The reason is simple, if perhaps a bit counterintuitive.Without at least a few reminders that earnings might miss, investors run the risk of being too sanguine.They come to assume that they will hear only good news from their favorite companies.If everyone is already pricing in good news, it can raise expectations to a point where it becomes increasingly difficult for companies to leap over an already-raised bar.

Again, it is WAY too early to draw conclusions from a sample size of 0.6% of SPX companies.That said, I’m somewhat concerned by the lack of concern coming into this earnings season.If companies can leap over the high bars that are set for them, then all should be fine.If not, then that leaves a bit more room for disappointment than we might otherwise face.

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