It’s all about the confidence that investors have in earnings. When you pay 18 times estimated forward earnings for a stock, you better be sure that the estimate will hold up. During January, the market proceeded in perfect faith that earnings estimates would turn out the right way. In February, maybe not so much.
Consider this morning’s mix of winners and losers on the S&P 100. The biggest loser is Wells Fargo, which just got handed an order from the Federal Reserve not to increase assets until it cleans up its act. The stock is down almost 9%. But then again, Blackrock is the number 3 loser, down 3%, and Bank of America is down 2%. There’s no news about either firm, but as a Bloomberg headline declared this morning, “Fed’s Wells Fargo punishment sets precedent for harsher era.” It’s not the fact, but the mere risk of tougher regulation on financial intermediaries, that weighs on the market.
Google continues to fall after its dicey earnings report last week. Amazon had a strong earnings report, but it’s down 2% this morning, for no other reason than that it is hard to predict. And FedEx is one of the worst performers, down 2%, again in the absence of news. Guilt by association with UPS is probably weighing on the courier service; the stock selloff, properly speaking, began on Thursday at 1 pm with UPS warning that higher-than-expected capital investment would suppress earnings growth. UPS got crushed and took the broad market down with it. Again, investors thought that courier services were easy to understand, and unlikely to show negative earnings surprises.
Even though earnings surprises have been favorable with more than half the S&P reporting Q4 results, a few high-profile disappointments or revisions to forward estimates swayed the market in the wrong direction.
By the same token, the best performers among large-cap companies overnight were the A-shares of Chinese banks. CITIC Bank was the best performer in the Hang Seng China Enterprises Index, up 4% (followed by Air China at +3% and Guangzhou Automobile at 2.6%). Evidently, investors think that Chinese earnings are more predictable. We have favored Chinese equities throughout and see the case strengthened by the trading outcome of the past several days.