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U.S. stock-market investors who are tired of the steep swings seen over the course of 2018 may look back at the first-quarter earnings season and think, “well that wasn’t so bad.”
According to Goldman Sachs, the reaction of stocks to earnings news has been less than expected thus far this reporting season, although it has been above a medium-term average.
Per the investment bank’s data, the average stock in the S&P 500 saw a move of 3.5% (either positive or negative) following the release of their company’s results, above the two-year average of +/- 2.8%.
The moves come at a time of heightened volatility compared with previous years. While the Cboe Volatility Index was historically low throughout 2017, it has spiked in 2018, with a historic number of 20% one-day moves. However, because those gains occurred from extremely low levels, the so-called “fear index” has frequently remained below its long-term average between 19 and 20. On Thursday it rose 14% to 18.20, its biggest one-day jump since April 2.
The VIX uses S&P 500 options to calculate expectations for volatility over the coming 30 days, and while it is up more than 40% to date in 2018, it fell 19.6% over the month of April, its biggest one-month decline since November 2016.
That drop in the volatility index speaks to how this earnings season hasn’t been as volatile, in terms of stock reactions, as it may seem at first blush. Per Goldman’s data, options investors were expecting S&P stocks to move 5.6% in either direction following their results. So while the realized move of 3.5% — with well more than half of S&P components having reported — is above the two-year average, it is below the implied level.
“Net, popular option buying strategies have produced lackluster returns,” wrote Katherine Fogertey, an options strategist at Goldman. She noted that straddles — an options strategy where investors bet that a stock will move by a certain magnitude, rather than in a specific direction — had generated an average return of -3%.
“Option investors have since lowered their expectations for moves on stocks yet to report,” she wrote.
For investors not playing options, the first-quarter season has been a mixed bag. Thus far this season, 55% of S&P components traded up following their results, according to Goldman, above the two-year average of 49%. However, the season certainly hasn’t felt like a positive one. While results have been strong — according to Thomson Reuters I/B/E/S, 79.9% of S&P stocks reported earnings above analysts’ expectations, putting the season on track for the highest beat rate on record, going back to 1994 — investors haven’t been enthused. Rather than advancing on the results, stock indexes like the Dow Jones Industrial Average and the Nasdaq Composite Index have mostly remained in a tight trading range.