There has been a lot of optimism in the stock market of late, resulting in a strong rally that was kickstarted by a belief that the second-quarter earnings season was supposedly “better than feared.” And, with 90 per cent of S&P 500 companies reporting results — and 75 per cent have beaten on the bottom line — it is seemingly hard to dispute this notion.
For starters, while the 75-per-cent beat rate is about average, the size of these beats has been far less impressive. As per FactSet, in aggregate, earnings have exceeded estimates by 3.4 per cent, which is considerably below the five-year average of 8.8 per cent. As it stands, this would mark the worst “beat” on S&P 500 earnings since Q1 2020 .
One of the more notable examples was Amazon.com Inc., which missed on earnings but whose stock price soared nearly 20 per cent between July 26 and Aug. 1 . One has to ask: were earnings really all that great, or did investors get too negative too quickly and were simply caught wrong footed? The outperformance of the most shorted stocks of late speaks to the latter as the most likely explanation.
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