US Stock Financial Reporting Season Stuck in "Zero Tolerance" Dilemma: Just Meeting Standards is Only Passable, High Valuation Becomes a "Tightening Spell" for Wall Street

Please note that the earnings season is in full swing on Wall Street, sending a clear message to companies that simply "performing well" is not enough. This week's market trends have reinforced this increasingly obvious viewpoint. While large banks such as JPMorgan (JPM.US) and Bank of America Corp (BAC.US) reported solid earnings and signals of consumer resilience, their stock prices had limited gains by the end of the week. Netflix (NFLX.US), with a current P/E ratio of around 40, faced a more dramatic market reaction. Despite the streaming giant exceeding revenue and profit expectations, and raising its full-year performance guidance, its stock price still fell by 5% on Friday. Analyst Ralph Shaw of William Blair commented on Netflix's earnings, stating: "Overall 'good' performance and guidance, but not good enough considering the high expectations." This disconnect between performance and stock price reaction is not isolated. As the earnings season progresses, the overall market is facing the issue of high valuations, with a growing awareness that even strong performance might not be enough to justify current stock price levels. Brian Jacobson, Chief Economist at Annex Wealth Management, stated: "The biggest risk currently is valuation. When we look at fundamentals, I think they will improve. But the question is how much of a premium are you paying for those fundamentals?" As companies entered this earnings season with increased uncertainty over tariffs, policies, and interest rate paths, market expectations have been lowered. According to FactSet data, analysts initially forecasted a slightly lower than 5% earnings growth for the S&P 500 index in the second quarter. With more companies reporting stronger than expected performance, this expectation rose to 5.6% by Friday. If this figure holds, it will still be the slowest earnings growth rate since the fourth quarter of 2023. As of now, 83% of S&P 500 companies that have reported earnings for the second quarter have exceeded earnings per share expectations, higher than the five-year average of 78%. However, the average earnings surprise of 7.9% is still lower than the five-year average of 9.1%. Facing this relatively easy threshold to cross, strategists warn that investors lack patience for any missteps. Jacobson stated: "I anticipate we will see a lot of volatility. Companies falling short of expectations will face a harsher punishment than usual. I think investors don't have the patience to deal with companies that don't meet expectations." After President Trump first raised the threat of "Tariff Day" in April, causing a brief sell-off, the stock market rebounded from its low point and reached new highs. Trump had pledged to impose tariffs on some of America's largest trading partners. The White House later softened its stance, first giving a 90-day grace period, and then extending the deadline to August 1. This concession sparked a familiar phrase on Wall Street - the so-called TACO trade, which stands for "Trump Always Chickens Out." This phrase reflects some investors' belief that the president often takes a tough stance on tariffs but rarely follows through with action. This assumption has fueled the market in recent months, as traders increasingly bet on a last-minute policy shift. However, despite the market's rise on hopes of a policy shift, the potential uncertainty has not disappeared. Mark Malik, Chief Investment Officer at Siebert Financial, stated that as the earnings season continues, investors will have a clearer understanding of how tariff-sensitive industries are performing in the current environment. "All signals currently point in the right direction," he emphasized, highlighting the upcoming uncertainties in the new round of earnings. "We know (inflation related to tariffs) will be a negative factor. It will either affect corporate profits or be directly passed on to consumers. The market is trying to digest all of this, and so far it's done well. But I believe another shoe will drop soon."