Evercore's Emanuel on earnings: Good news may not be so good

As companies in the S&P 500 (^GSPC) — especially Big Tech leaders — begin to report first-quarter earnings, it's evident companies' prospective stocks are reacting negatively to overly positive earnings news. Evercore ISI Senior Managing Director Equity of Derivatives and Quantitative Strategy Julian Emanuel joins Market Domination to discuss how stocks are responding to quarterly results, as well as touch on the trajectory of the S&P 500 as the likelihood of interest rate cuts in 2024 by the Federal Reserve starts to dissipate.

"The bigger message is that the companies that have done well in some cases have seen their shares perform poorly... case in point, it's the double beats, the ones beating on EPS and revenues," Emanuel tells Yahoo Finance. "And the share price reaction that is... less than stellar, and some cases outright poor, that's what really tells us that the broader market is having digestion problems in and around this earnings season."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video transcript

- Let's talk a little bit more about earnings season as we get that ramp up. It brings along the usual volatility we've seen in stocks. We've seen some beats. We've also seen companies that miss on the top and bottom line, really punished by investors here. Joining us now to discuss, Julian Emanuel is a senior managing director and head of equity derivatives and quant strategy at Evercore ISI.

So Julian, let's start with a stat you had in your note today about the way companies are being punished for that double miss and, if anything, that says to you about sentiment on the Street and just the way we've seen markets acting over the last couple of weeks.

JULIAN EMANUEL: Well, so obviously, the volatility across markets broadly is higher these last several weeks, and that is sort of in line with our more cautious view in the near to medium term. But when you think about earnings, actually, the violence both in terms of beats and misses was something we saw last reporting season. And, obviously, it's very early.

A small preponderance of companies have reported. But to your point, the misses have been punished, which is what you would expect in a more hostile-type tape that's pulled back the way it has. But to us, the bigger message is that the companies that have done well in some cases have seen their shares perform poorly.

The world's leading money center bank, which reported a week ago Friday, really a case in point. It's the double beats, the ones beating on both EPS and revenues and the share price reaction that is less than stellar and, in some cases, outright poor. That's what really tells us that the broader market is having digestion problems in and around this earnings season.

JULIE HYMAN: What do you think are the underlying factors behind those digestion problems, Julian?

JULIAN EMANUEL: Well, I think it's two things, Julie. Number one, what you're seeing is this sort of bifurcation between shares that have been really driven by momentum perhaps over and above, you know, what a typical financial stock or what have you. Might have obviously the semiconductor names. And to the point-- the news out of Taiwan overnight sort of clarifies that, and you've seen that in the prior day, the news out of the Netherlands, et cetera, that the momentum names have just gone too far.

But when you think about it from an overall market perspective, the S&P 500 is trading at about 23 times the last 12 months earnings. So, basically, given these extended valuations, even good news may not be good news particularly in these names that have run as far as they have.

- And Julian, I'm curious over the last couple of weeks here. Looking at 4,750 on the S&P at the end of the year, a lot of your colleagues on the Street have been raising their price targets, probably a lonely place to have been. What has been the pushback that you've gotten from folks? And is this, you know, tape maybe acting the way that you and your team have thought it would as we got through that really euphoric first quarter of the year?

JULIAN EMANUEL: Well, you know, that black eye I had has only cleared up in the last several days and I hate to think that a market selloff would help it heal. Look, here's the thing, right, is that when you think about the underpinnings of the goldilocks environment that we have been very fortunate to be a part of, most particularly since the Fed's pivot in December, which, at the present, is looking less and less call it pivotal since we've gone from pricing in six cuts to then pricing in three, and now pricing in below two.

And the problem with that is the market was able to digest going from six to three because the Fed always promised three. And now we're not so sure about three. We're thinking two, one, or maybe even zero. That's a headwind. Earnings are a headwind.

The expectation for 2024 is north of 10% growth. That's why if you don't raise the bar even higher, regardless of how you reported the most current quarter, your shares are going to be probably subject to weakness. And then, again, the last thing I would say is, look, we saw a lot of FOMO in February and March.

The public put money into stocks, the speculation in options. And then, you know, frankly, the momentum names peaked in March. And when that leadership begins to transition, and its transition towards energy, that tends to be a headwind for stocks more broadly.