With its share price falling by 29.5% this year, the market has questioned Musk's multi-line operations strategy and its impact on the company's future. As CEO of Tesla, Musk also manages SpaceX, Neuralink, The Boring Co., as well as his recently acquired social media platform X (formerly Twitter) and AI startup xAI.$S&P 500 Index (.SPX.US)$More than one third of companies are about to release their earnings reports, marking the arrival of a highly anticipated earnings season. However, behind these high expectations is investors' more severe 'punishment' of companies whose performance falls short of expectations.

According to data from FactSet, after listed companies announced earnings that fell short of expectations in the second quarter, their stock prices fell an average of 3.8% within two days after the earnings report was released, while the average decline over the past five years was 2.3%.

Meanwhile, the stocks of companies whose performance exceeds expectations have not risen as much as in the past, with such stocks rising only an average of 0.3% within two days of the earnings release, while the average rise over the past five years was 1%.

This phenomenon reflects the market's "high expectations" and "overvaluation" for this earnings season. So far this year, the S&P 500 has risen by more than 14%, with an expected P/E ratio of 21.

Analysis points out that$Microsoft (MSFT.US)$,$Meta Platforms (META.US)$,$Apple (AAPL.US)$And.$Amazon (AMZN.US)$heavyweight enterprises such as Technology stocks that account for 40% of the S&P 500 index market cap will all release quarterly earnings this week, making it critical for technology stocks to recover from last week's decline. The market has very high profit expectations of large technology stocks, and any results that do not meet expectations could hit their overvalued stock prices and even drag down the entire market.

Peter Boockvar, Chief Investment Officer of Bleakley Financial Group, said in an interview with the media:

"The strong performance of some stocks this year has set a high threshold for the upcoming earnings season. Even if these companies can exceed earnings per share (EPS) forecasts, the market has already factored these expectations into stock prices. For many stocks that have performed well this year, valuation is undoubtedly a major challenge."

Outperforming stocks are doing better than usual

The strategist at Bank of America, Savita Subramanian, and her team found that individual stocks of outperforming companies are doing better than usual compared to the benchmark index.

Among the S&P 500 component stocks, on the day after the quarter when companies announced sales and earnings per share (EPS) that were higher than Wall Street's expectations, individual stock performance was 2.4 percentage points higher than that of the S&P 500, reaching a new high since the fourth quarter of 2018. The historical average is 1.5 percentage points higher than the S&P.

When punishing stocks whose profit fell short of expectations, Bank of America found out that the stocks performed 2.2 percentage points worse than the benchmark index, and the historical average was 2.4 percentage points worse than the S&P.

Subramanian wrote in the report:

"This may indicate that recent market-driven factors may become more diversified as attention is paid to other themes beyond artificial intelligence."

Investors are withdrawing from well-performing large-cap stocks and turning to small-cap and cyclical stocks

In this week, more than one-third of all 11 industries covering the S&P 500 index will release their financial performance, and more than 200 companies have already announced their earnings.

Bank of America's analysis shows that these companies overall achieved a performance that is 3% higher than the earnings forecast. Although the number of companies that exceeded expectations in both earnings per share and sales compared to the previous quarter has decreased, the number of companies that mentioned insufficient demand has also decreased, and the company's future performance guidance has improved to its highest level since August 2023.

However, not all better-than-expected earnings reports receive a positive response from the market. For example, $Ford Motor (F.US)$the company's stock price plummeted more than 18% in one day as its earnings report did not meet profit expectations due to higher-than-anticipated warranty costs. Similarly, diabetes management company$DexCom (DXCM.US)$also saw its stock price crash 40% due to poor revenue and gloomy performance guidance. Even JPMorgan, a company that announced profits and revenues exceeding market expectations, saw its stock price fall slightly by 1% on July 12th.

John Belton, portfolio manager of Gabelli Funds, commented in an email:

"In this earnings season, the performance of many important leading companies exceeded market expectations. The market is currently showing a continuing rotation trend and a more defensive mindset, and I think this may lead to a brief market correction."

As the technology stocks lead the strong market rally, it begins to spread to small-cap and cyclical stocks. Investors are withdrawing from large-cap stocks with excellent performance and turning their attention to other fields. This week, investors will pay close attention to a series of important financial reports, especially the performance of technology giants such as Microsoft, Meta platform, Apple, and Amazon, which may have a significant impact on the market sentiment.

Editor/new