Good guidance is the new earnings beat for investors
Why it matters: In a moment of marked policy uncertainty, companies are struggling to meet investors' lofty expectations on their forward guidance, which could put pressure on the broader market.
By the numbers: Companies that beat both revenue and profit estimates on average outperform the S&P 500 by nearly 1.9 points the following day, per data from Bank of America.
Companies that deliver upward guidance outperform the index by 3 points the next day, but companies that miss on guidance underperform by nearly 4 points.
Meanwhile, the gap between how many companies beat expectations, versus miss them, is now at its widest point in three years.
40% of companies have raised guidance for the second quarter, versus 10% for the first following tariff uncertainty, per data from Citi.
What they're saying:"Meeting expectations isn't even necessarily sufficient," said Steve Sosnick, chief investment officer at Interactive Brokers.
It's not enough to hit guidance expectations anymore. Companies have to exceed them.
For example: Alphabet reported beats on the top and bottom lines, but the company doesn't provide formal guidance on earnings calls. The stock had a modest upside reaction the day after.
Texas Instruments delivered guidance that was better than most estimates, but its stock still saw its worst decline in nearly two decades, all because its outlook wasn't rosy enough.
Be smart: In a frothy market, guidance matters. Upbeat forecasts suggest that companies see enough growth ahead to justify lofty valuations.
"I think it's a sign of the market's mood right now," said Sosnick, who added that markets have already priced in good news on earnings.
That means companies have to "not just meet expectations" but also "exceed them" in order to really drive outperformance.
Yes, but: Sosnick adds that investors have seen this movie before.
Some CFOs had to reforecast daily during the coronavirus pandemic, said Chris Wright, a managing director at global consulting firm Protiviti.
"There's muscle memory there," he told Axios.
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