Wall Street Runs Out of Patience... Starbucks Stock Plummets the Day After Earnings

-16%. This is the drop in Starbucks' stock price the day after it released its first-quarter earnings. While the net profits of large companies listed on the U.S. S&P 500 index are expected to increase by more than 5% compared to a year ago, there is an assessment that Wall Street's patience has run out. This is because the stock prices of companies like Starbucks, whose earnings fell short of expectations, have dropped more sharply than in previous years.

[Image source=Reuters Yonhap News]

The daily Wall Street Journal (WSJ) reported on the 12th (local time), citing FactSet, that an analysis of stock prices over four trading days before and after companies' first-quarter earnings announcements showed that companies that posted worse-than-expected results saw their stock prices fall by an average of 2.8%. This exceeds the average decline of -2.3% over the past five years.

A representative company is Starbucks. Starbucks' first-quarter visitor numbers plummeted, causing both sales and profits to fall short of Wall Street's forecasts. As a result, the market was greatly disappointed, and the stock price plunged about 16% the day after the earnings announcement, hitting the lowest level since July 2022. Discount retailer Five Below also saw its stock price drop more than 15% immediately after releasing its earnings at the end of March. The stock price declines of these companies have yet to recover from double-digit losses.

Meanwhile, Netflix is a case where, despite exceeding first-quarter sales expectations due to an increase in new subscribers, the stock price plunged after it disclosed a weak earnings forecast for the second quarter. Netflix's stock price dropped by 9% the day after the earnings announcement. However, Netflix has since recovered most of its losses.

George Gonkarvs, U.S. Chief Macro Strategist at MUFG Securities America, analyzed, "(The market) will not ask questions," adding, "If companies fail to deliver results, their valuations can be lowered very quickly." He explained that Wall Street shows almost no patience for companies that fail to meet expectations.

However, companies that posted better-than-expected first-quarter earnings did not receive any surprising rewards either. The stock prices of companies that recorded earnings surprises rose by an average of 0.9%, in line with the five-year average (+1%).

The WSJ diagnosed, "Companies that fail to meet investors' expectations are being punished more heavily than usual," and "Companies with outstanding performance are not given special rewards." Considering the ongoing uncertainty surrounding interest rate cuts by the Federal Reserve (Fed), the outlet added that most company stock prices appear to be overvalued, stating, "Companies have very little room for error."

The 12-month price-to-earnings ratio (PER) of the S&P 500 index is about 20 times, far exceeding the 10-year average of 18 times. Additionally, the prospect of prolonged high interest rates is reducing the attractiveness of stocks compared to bonds. This is also a factor that could increase companies' borrowing costs.

Tim Hayes, Chief Global Investment Strategist at NDR, said, "The market needs to reset expectations," noting, "There may be a more realistic view of where things are headed and what earnings are."

Meanwhile, according to FactSet, the net profits of S&P 500-listed companies, which are nearing the end of their first-quarter earnings announcements, are estimated to increase by 5.4% compared to the previous year.