Citibank: Earnings season enters a "two-way massacre," with the number of U.S. stocks swinging more than 10% on earnings day surging.

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As U.S. stock valuations continue to remain at high levels, earnings season is becoming a true "two-way massacre"—beating expectations no longer guarantees a rise in share prices, and even minor flaws can lead to severe punishment. The market's tolerance for corporate earnings has dropped to a low point.

According to Citi's data, since 2024, the number of S&P 500 constituent stocks experiencing a price swing of more than 10% on the day of their earnings release has risen significantly, reaching 30 to 40 companies in several quarters—and in the first quarter of this year, even breaking 60—far higher than the typical quarterly level of only 10 to 20 in the past decade. This means that large price swings on earnings day are gradually becoming the new normal for U.S. stocks.

More challenging, the earnings threshold in this round of reporting season is also constantly rising. Analysts have not continuously lowered earnings expectations as in previous years, but have instead upgraded forecasts throughout the second quarter, leaving companies with almost no traditional "cushion." Against this backdrop, simply delivering an "above expectation" report card is no longer enough to convince the market.

Even Beating Expectations May Lead to Declines

Samsung Electronics’ second quarter operating profit grew nearly 19-fold year-over-year and beat market expectations, yet its stock plunged 7% in a day; Pepsi’s quarterly revenue beat estimates, but shares still closed down 3.3%. In stark contrast, Micron Technology’s June 25th report beat expectations and its guidance, causing shares to surge over 16% in a single day, marking the company’s best-ever earnings day performance.

The same "beat" on expectations, but the market reacts very differently—reflecting how investors now pay more attention to earnings quality, forward guidance, and whether valuations are sufficient to support share prices.

According to Citi statistics, the number of S&P 500 constituent stocks swinging more than 10% on earnings day has been steadily rising in recent years. Mark Hackett, Nationwide’s Chief Market Strategist, notes that for nearly the past two years, high volatility during earnings seasons has almost always persisted, with one key reason being overall market valuations are elevated. He says investors can only assess the reasonableness of prior valuations once earnings are released.

Abnormal Upward Revisions of Earnings Expectations, Companies Lose "Cushion"

Compared to previous years, the biggest change this earnings season is that profit expectations have not been lowered.

Traditionally, analysts usually gradually lower earnings forecasts during the quarter, creating an easier baseline for companies to beat expectations. However, FactSet data shows that from March 31 to June 30 this year, bottom-up EPS estimates for the S&P 500 were raised by 3.4%; by contrast, over the past five years, estimates were cut by an average of 2% during the same period, and by 2.7% over the past ten years.

In other words, companies are facing ever-higher standards for assessment.

Ameriprise’s Chief Market Strategist Anthony Saglimbene notes that, similar to the previous quarter, there is virtually no traditional buffer for earnings expectations this season. He believes the market now places more emphasis on whether companies can fulfill their full-year guidance, maintain margins, and management's outlook for the future—not just whether single-quarter earnings beat expectations.

"Beating Expectations" Is No Longer the End Point

Analysts forecast S&P 500 second quarter per-share earnings to grow 23.3% year-over-year, higher than the 18.8% expected at the end of March; revenue is expected to grow 12.2%. If realized, this will be the second consecutive quarter of 20%+ earnings growth for the S&P 500, and also the fastest revenue growth since Q2 2022.

However, with such high market expectations, simply beating earnings forecasts is increasingly insufficient to boost stock prices.

Saglimbene believes companies must simultaneously prove margins remain robust, full-year guidance isn't deteriorating, and earnings growth is spreading from a few AI and technology leaders to broader sectors before the market will grant higher valuations.

Hackett points out that even within the same industry, different companies' stock performance may diverge dramatically—this is the biggest feature of the current earnings season.

Nevertheless, he also states that unlike prior earnings seasons where the market rallied significantly beforehand, this time the S&P 500 has mostly oscillated sideways since mid-May. This means the market hasn't prematurely exhausted too much optimism, leaving some space for subsequent earnings-driven moves.

Risk Disclosure and DisclaimerThe market carries risks; investment requires caution. This article does not constitute personal investment advice and does not take into account the individual investor’s specific targets, financial situation or needs. Investors should consider whether any opinions, viewpoints or conclusions herein suit their own circumstances. Investment is at your own risk. ```