Please ensure Javascript is enabled for purposes of website accessibility

Mixed Earnings Season Suggests Buying Fatigue

A second straight earnings season of double-digit profit growth has failed to budge stocks. Is buying fatigue setting in after an extended bull market run?

You would think a second straight earnings season of double-digit growth would have pushed this bull market even further into record territory. Instead, it’s been a boring stock market of historic proportions, with almost no movement since earnings season began a month ago. What gives?

Strong Earnings Season Not Translating to Returns

After all, with more than 80% of companies in the S&P 500 reporting, the 10.1% average EPS growth rate would mark the second-best quarterly increase in corporate profits since 2011. Even in the dog days of July and August, that kind of growth is typically enough to inspire some new buying on Wall Street. Instead, most of the companies that have beaten earnings estimates (and so far, 72% of large caps have) got very little corresponding bumps in their share prices. Meanwhile, the companies that have missed estimates have gotten pummeled.

Jacob Mintz, our options trading expert, thinks it’s a matter of “buying fatigue.” After rallying 18% in eight months, reaching price-to-earnings ratios not seen in more than a decade, stocks have plateaued now that most of Wall Street is taking its late-summer vacation. Growth—even double-digit growth—is met with indifference, while any signs of weakness has been punished severely.


Last week was a perfect example of how hard investors have been on companies that have underwhelmed this earnings season. Look at this list of post-earnings collapses:

  • Applied Optoelectronics (AAOI) down 33%
  • Unisys (UIS) down 29%
  • Coherent (COHR) down 20%
  • Ultimate Software (ULTI) down 14%
  • Fluor (FLR) down 10%
  • Teva Pharmaceutical (TEVA) down 36%

Big picture, it might not mean much. After all, the market has at least managed to tread water over the last month despite all the big post-earnings drops in certain stocks. Considering it entered earnings season at all-time highs—and given the market crashes in recent Augusts—stagnation isn’t necessarily a bad thing, at least for now.

Of course, now that earnings season is winding down, North Korea has taken center stage, and that clearly had investors spooked yesterday: the Dow tumbled more than 100 points in early trading and the VIX (the volatility index ETF) spiked to its highest level since May. We’ll see if that’s a fleeting, one- or two-day panic move, or if concerns over a conflict with North Korea start to weigh on the market in a more permanent fashion.

What we can conclude is that a blowout Q2 earnings season failed to extend the rally. That may be due more to a lack of investor participation than anything. As our growth investing expert Mike Cintolo pointed out, the Nasdaq hasn’t seen above-average trading volume since late June. Perhaps when volume presumably ticks up in September, buying will return.

Short-term Correction Needed?

In the short term, a little pullback in the indexes might not be a bad thing. If there is buying fatigue with markets at all-time highs, a small correction on the heels of almost a month of no share price movement could be just the thing to extend this bull market in the longer term.

In many ways, our investing habits are similar to our shopping habits: we want to see lower prices before we decide to start buying. Psychologically, even a small drop in share prices could be enough to awaken Wall Street from its summer slumber.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week and Cabot Value Investor .