Strange Gyrations This Earnings Season Spark Investor Confusion

    It’s been a rip-roaring earnings week to close out April. As encouraging as it has been in some ways in terms of key earnings beats themselves, the only consistent message in terms of their reflection on equities has been one of nervous confusion. The tone on Wall Street seems to be one of “earnings please save the day” and in some cases, post earnings reactions have been somewhat mystifying. Could the confusion be signaling a trend change in progress?

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    Let’s consider the following cases. (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG), and Caterpillar (NYSE:CAT). Two are FANG stocks, and we include Caterpillar here because it is typically seen as a bellwether of business cycle inflections.

    Amazon is of course the big story today, smashing all earnings and revenue expectations and zooming up 10% to all time highs. Revenue increased 46% to $30.7B, though this includes Whole Foods sales that weren’t there this quarter last year. International sales though grew an impressive 34%, an Amazon segment often overlooked by domestic US investors.

    The international segment is somewhat overshadowed by the North American “retailpocalypse” generally blamed on Amazon. However, Amazon has been making similar moves internationally with firms that American ears wouldn’t typically be familiar with. Back in late March for example, French retail giant Groupe Casino headed byJean Charles Naouri, (IOB:0HB1.IL) slightly less than half the size of Amazon by employee count, closed with Amazon through Groupe’s Monoprix subsidiary on a deal to bring its groceries to Amazon Prime Now subscribers in Paris and its suburbs. Deals like these are an integral part of Amazon’s international footprint.

    But the reaction in terms of price action has been mixed, so far. Shares started off 10% higher in the premarket, but have since slumped down 6% from highs. The intense back and forth could be ignored if there weren’t other recent examples of trader confusion.

    Consider Alphabet. The search giant also posted earnings and revenue beats that bested consensus estimates by $0.64 a share and $870M in top line. Yet this wasn’t enough to impress traders beyond a momentary blip up. Shares responded with a wave of selling that brought price down by 4%. This kind of movement on impressive earnings beats looks like investors trying to lighten their positions ahead of positive news, perhaps for fear of what may be coming to the equity markets down the road.

    Caterpiller’s post earnings gyrations were even stranger. Shares were initially up 4.6% on its $0.75 earnings beat and near $1B beat in revenue. They then fell 11% in a matter of minutes in a move that had everyone guessing when it would finally stop. Shares have yet to recover from that down move. The extreme volatility in Caterpillar shares may be signaling that a trend change could be underway for equities. Business cycles tend to affect companies farther up in the capital goods sector of the economy more acutely and sooner than they affect tech stocks like Amazon or Alphabet.

    What will be interesting to see is what happens with these three stocks in the aftermath of their earnings beats. If sellers are indeed waiting for good news in order to lighten positions, there could be more selling on the way in the weeks to come.

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