Chart of the Week: Why this earnings season is different
The market reaction to earnings is unusual and volatility is up.
This week’s Chart of the Week comes from Morningstar’s market strategist Lochlan Halloway’s earnings analysis.
Our Fair Value Estimates (FVE) indicate what we believe is a share’s instrinsic value over the long term. It allows investors a comparison point to the share price, which reflects where the market believes the share’s value is.
We’ve raised Fair Value Estimates for 44% of our coverage, slightly higher than average in recent reporting seasons. But downgrades are also ticking up: we’ve now cut Fair Value Estimates for 14% of businesses at 29 August, up from 9% from the week prior.
It’s a meaningful increase, though not out of keeping with recent reporting seasons. Perhaps most remarkable is the big uptick in share price volatility.
Approximately halfway through earnings, the standard deviation of share price changes on results days was about 7%.
That was well below February this year and August last year. But by Friday the 29th of August, volatility has spiked. In the week prior, the standard deviation of price changes on results day has exceeded 10%. In short, the tails have become much fatter.
Unusually, volatility isn’t confined to the small caps. We’re accustomed to seeing small, thinly covered stocks swinging wildly on results day. A 20% or even 30% move isn’t completely out of the ordinary. But we’re not used to seeing the blue chips behave like this.
Last week’s chart was the largest reactions to announcements by way of sell-offs. In that list were large caps CSL and James Hardie.
Lochlan Halloway explains that it needs to be acknowledged that these results were disappointing. Although results are more disappointing than expected, market reactions may not be justified. Increased volatility may mean fertile breeding ground for investors to find opportunities where the market has misprices companies, overreacting to short-term earnings results.
His analysis takes a deep dive into the reasons behind a more dispapointing earnings season than normal, with his analysis available to Morningstar Investor subscribers.
You’re able to find previous editions of Chart of the Week here.
