Earnings Season: The Good, the Bad, and the Ugly

05/02/2014 7:00 am EST

Focus: ETFs

Halfway through the Q1 earnings season, the staff at BespokeInvest.com takes a look at how the market has reacted to hits, beats, and misses.

So far this earnings season, the average stock that has reported earnings has declined 0.35% on the first trading day following its report. (For companies that report in the morning, we use that day's change. For companies that report after the close, we use the next day's change.) There have been some big differences in how stocks have reacted to their earnings reports based on which sector they are in, however. Below is a look at the average one-day change in response to earnings reports broken out by sector.

1 Day % Change Chart

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As shown, three sectors have seen their stocks average gains on their report days, while five have seen their stocks average declines. Telecom (XTL) and Utilities (XLU) are not included since only a very small amount of companies in these sectors that have reported.

Consumer Staples (XLP), Energy (XLE) and Industrials (XLI) are the sectors that have seen positive reactions to earnings reports this season. The average energy stock that has reported has gained nearly 1% on its report day, which is a very strong reading. It's no surprise, though, given how strong the energy sector has been over the last few weeks.

One sector sticks out on the downside, and that's Technology (XLK). Tech was weak coming into earnings season, but anyone looking for a bounce from strong earnings has to be disappointed. So far this season, the average tech stock that has reported has fallen 1.6% on its report day.

Below is a look at the average one-day reaction to companies that have beaten consensus earnings estimates on their report dates this season. As shown, consumer staples stocks that have beaten estimates have gained the most on their report days at +2.49%. Interestingly, even though the energy sector has the best one-day average gain for all of its stocks that have reported earnings, the energy stocks that have beaten estimates have only gained +1.37% on their report days, ranking it fourth out of the eight sectors featured.

Stocks Beating Estimates Chart

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The weakness in technology shows up in this chart as well. The average tech stock that has beaten earnings estimates has only gained 0.45% on its report day, which is the smallest gain of any sector.

Finally, below is a chart showing the average one-day change by sector for companies that have missed EPS estimates. Tech and energy are again big standouts. For energy, it can't get any better, because even the companies in the sector that have missed estimates have averaged gains on their report days. For tech, it can't get much worse. As shown, tech stocks that miss estimates have gotten punished severely with an average one-day decline of 6.71%! That's by far the worst reading of any sector.

Stocks Missing Estimates Chart

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So far this season, tech stocks that have beaten estimates have averaged the smallest gains of any sector, while tech stocks that have missed have averaged by far the largest declines. Clearly investors have taken a decidedly bearish turn on tech this earnings season by punishing misses and not rewarding beats. If you're still bullish on the sector even after such disappointing performance, you're hoping this represents a short-term washout for tech that overshot to the downside. Expectations heading into next earnings season will likely be very poor for tech, so if stocks in the sector can deliver, the reverse should occur where beats go up big and misses decline very little.

By the Staff of BespokeInvest.com

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