By Jacob Sonenshine

Stocks have made particularly large moves after quarterly earnings as the season kicks off. It's a sign the market is on edge.

So far 15% of the companies in the S&P 500 have reported. The average stock price movement the trading day after an S&P 500 company has beaten both sales and earnings estimates has been a 3.6% gain. That's higher than the 5-year average of 0.9%, according to Evercore.

The average move after a company misses on both lines is down 5%, worse than the 3.1% five-year average, Evercore data show.

While stocks have been more volatile around earnings than they are historically, a finer look shows the strong performance has been largely driven by a narrow group of stocks -- namely the big banks.

JPMorgan Chase shares inched higher after earnings surpassed analyst expectations, Wells Fargo's stock rose almost 7%, Goldman Sachs Group's gained 6%, and Morgan Stanley's rose 4%.

Big banks are a major reason why the financial sector has seen an average stock price move that's up 2% after earnings this reporting season, according to Evercore. It is one of just four sectors -- out of 11 in the S&P 500 -- to see better than 1% gains after earnings.

But banks, unlike other areas of the market, came into earnings season with room to rally on strong-enough results. They had dropped by double digits in the weeks leading into earnings. As a group, they were trading at an average forward price/earnings multiple of about 11 times, roughly half of the S&P 500's 22 times.

Netflix is also driving the data showing strong stock returns after earnings beats. It's the only company in the communications services sector to report so far, and it gained 10% after beating on both top and bottom lines.

The stock wasn't cheap, but it rallied because it's exhibiting a rare and company-specific story of marked strength. Even though it has become a massive company, its sales growth isn't decelerating, as it competes adequately against streaming competitors at home, and continues to expand in newer markets abroad.

Overall, big banks and Netflix were the bright spots in the data. A majority of sectors have had stock movements after earnings that are anywhere from flat to down, according to Evercore. And the drops after misses have been worse than usual.

Shares of J.B. Hunt Transport Services fell just over 7% after missing earnings estimates. Guidance was fairly weak, too, with analysts calling for just over 3% sales growth this year to $12.4 billion, still below the peak of $14.8 billion in 2022, according to FactSet. Industrial demand remains below peaks from just after the pandemic.

Constellation Brands, maker of wine and beer, dropped 17% after missing on both top and bottom lines.

The equal-weighted S&P 500, which removes the outsize effect of Big Tech and better reveals the valuation of the average stock, trades at 17 times expected aggregate earnings for the coming 12 months. That's up from a low of just under 12 times since late 2021, and is close to the just over 17 times it touched in December of 2021, when interest rates were far lower and the index was at a peak.

Now, rates are higher and markets are closely monitoring how that will slow down economic growth and companies' sales and earnings. That leaves plenty of room for stocks to drop. All it takes is for the market to see little room for even higher earnings estimates, or worse, to see reason to reduce earnings expectations.

"The natural connection is that it's pretty critical that companies report earnings and provide outlooks that support the valuation," says Scott Chronert, strategist at Citigroup.

Volatility lurks beneath the surface. Take note.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 24, 2025 14:12 ET (19:12 GMT)

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