The Stock Market Is Ignoring Good Earnings. Here’s Why.

By Jacob Sonenshine

Jan. 27, 2021 12:32 pm ET

COVID-19 vaccine is stored at -80 degrees Celsius in the pharmacy at Roseland Community Hospital in Chicago, Illinois.

Scott Olson/Getty Images

Companies are beating earnings handily but that doesn’t seem to matter much for the stock market—and it’s not just today’s selloff that is making investors less bullish on the beats.

Earnings have been fantastic. By Wednesday, more than a quarter of the S&P 500’s market capitalization had reported earnings. More than 85% of companies had beaten estimates by any margin and they had beaten estimates by 20% in aggregate, according to data from Credit Suisse strategists, well above an average beat level in the mid-single digits.

But stocks have actually performed poorly after releasing earnings this reporting season. As of Tuesday, about 57% of companies had seen their share prices fall 1% or more in the trading session just after the release, according to RBC data. Only 22% of reporters have seen their stocks rise 1% or more. “Companies have posted strong beats for 4Q, but there doesn’t seem to be a lot of incremental excitement over 2021 forecasts,” wrote Lori Calvasina, chief U.S. equity strategist for RBC Capital Markets in a note.

There is good reason for that. First off, valuations are looking more stretched, so near-term earnings momentum is likely priced in. Secondly, earnings reports are backward-looking, and, especially now, investors want to know what’s coming next. The biggest factors driving any upside at all to earnings for 2021 will have less to do with the economics of the past three months and more to do with major developments that will shape the economy over the next year.

The strongest narrative out there is that the billions of Covid-19 vaccine doses to be distributed over the course of 2021 will reopen the economy. When they do, consumers and businesses will unleash the pent-up demand that has built up on corporate and household balance sheets as a result of fiscal and monetary stimulus, bringing economic activity and earnings back to pre-pandemic levels. If you’re bullish on the market, that narrative is likely unchanged.

Those macro forces, which impact earnings for most companies, are having a larger impact on the broader stock market than individual stock stories are, GameStop (GME) and its ilk being the exception. The margin between macro and micro forces on stocks is still wider than it has been historically.

It’s not that earnings don’t matter. It’s just that management teams can’t tell anybody whether vaccines are coming out on schedule and how effective they are against new Covid-19 variants. When they can, good earnings will start to be a positive catalyst again.