Equity investors are meting out some of the harshest punishments ever for companies that miss expectations, just as strategists sound the alarm that earnings growth has likely peaked.
Amazon.com Inc. became the latest firm to face sharp post-earnings selloffs by plunging Friday morning and dragging on the S&P 500, following disappointing results from Google-parent Alphabet Inc. that sent its shares to a record drop on Thursday. Investors in communications services stocks are now penalizing misses with the steepest selloffs since Bloomberg began collecting data in 2019. The same dynamic is playing out in the heavily-weighted tech sector.
The market is “a lot more sensitive than it might normally be,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management, adding that investors would rather sell first and ask questions later rather than get stuck nursing further losses.
Strategists from Wells Fargo to Franklin Templeton were among those in recent weeks predicting the S&P 500 corporate earnings expansion would decelerate as higher interest rates, tariff pressures and elevated oil prices weigh on results. Roughly a third of the way through the reporting season, their forecasts have proven on point: Earnings growth has slipped to roughly 26% — still elevated compared with historical norms but below the 32% growth rate seen in the second quarter, the data show.
The earnings slowdown is being led by the market’s largest sector. Tech profit growth is seen decelerating to 65% in the third quarter, from nearly 77% last quarter, according to Bloomberg Intelligence. Similarly, communications services is expected to slow to just 3.2% from nearly 10%.