US results season has been a success so why aren’t stock prices higher?

More American companies than average have exceeded expectations this earnings season, but a number of outstanding issues are clouding the outlook.

A US earnings season clouded by banking turmoil and recession fears is ending with S&P 500 index companies ahead of expectations by the biggest margin since the end of 2021.

About 85% of results had been filed by the end of last week, with financial data company FactSet reporting that 79% of earnings per share were above Wall Street estimates.

This compared with the five-year average of 77% and the 10-year of 73%, while the aggregate of 7% above estimates is better than the 6.4% seen across the past decade.

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The beats currently reduce the year-on-year decline in earnings to just over 2%, but they haven’t been sufficient to kickstart the S&P 500 at a time when investors are focused on tightening credit conditions in the wake of the US regional banking crisis.

The lagged effect of the Federal Reserve’s most aggressive monetary policy tightening cycle since the 1980s have also fuelled recession fears.

A dip in April’s headline inflation rate to 4.9% today offered some hope that rates are at their peak, helping the S&P 500 index to find positive territory at the opening bell.

But the leading US benchmark is roughly flat versus the start of the results season, with UBS Global Wealth Management noting that share prices have outperformed half as much as usual following earnings beats, and misses have underperformed by more.

Its chief investment officer Mark Haefele said: “While first quarter earnings have topped expectations so far, we believe the outlook for corporate profits remains challenging, amid negative trends in technology spending and more conservative tones from managements.

“The Fed may have hinted that an end to rate rises could be in sight, but the lagged effect of 500 basis points of rate hikes over the past 14 months is continuing to feed through into the economy.”

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One of the companies under pressure this week has been Airbnb after the holiday rental business offset a strong first quarter performance with guidance for the current quarter showing year-on-year revenues growth of between 12% and 16%.

That disappointed Wall Street following first quarter growth of 20% as shares gave up some of this year’s 50% improvement by falling 14% after last night’s closing bell.

Bank of America analysts said this week that forward guidance has been strongest in the healthcare and industrial sectors, but as these are already crowded trades for investors the share price reaction has been relatively modest.

It added that some strong figures from Big Tech including by Facebook owner Meta Platforms meant Nasdaq earnings ticked up versus S&P 500 earnings after lagging for over a year.

The bank said: “While we still see cyclical headwinds for tech after Covid demand pull-forward, there are signs of stabilisation following cost cutting efforts.”

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Looking beyond 2023, it said earnings are likely to outpace the economy next year as the downturn in profitability began earlier than the economic downturn in this cycle.

The bank added: “Earnings also tend to recover stronger than they fall as downturns usually remove excess capacity, resulting in leaner cost structure and improved margin profiles.”