Earnings season is repeating a tech-bubble trend filled with counterintuitive market reactions, Bank of America says

• An unusual trend has emerged in the current earnings season that hasn't been seen since the early-2000s tech bubble, Bank of America said in a Monday note.
• Companies that beat both profit and revenue estimates are underperforming the most in history, while those missing expectations are outperforming the most in history, according to the bank's analysts.
• The "perverse reactions" could be "a harbinger of a market dip" akin to that seen when the tech bubble burst, they added.
• The lack of alpha could be tied to traders pricing in earnings and paying more attention to macro trends and the upcoming presidential election, the bank said.
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Public companies are posting unusually strong quarterly figures, but the market's reaction has been far from consistent.

Roughly 37% of S&P 500 firms have reported third-quarter earnings so far, with another 40% set to report this week. Nearly seven-in-10 companies have beaten expectations for both revenue and profit, handily exceeding the 40% average share, according to Bank of America data. The figure also represents the strongest second-week earnings performance in data going back to late 2011.

Yet the market has been rife with "perverse reactions" to the largely encouraging reports, the bank's analysts said. Earnings beats this season have underperformed the S&P 500 by 0.05 percentage points, the worst in history. Conversely, earnings misses are, on average, outperforming by 0.6 percentage points, the highest in history.

The reactions "smack of the tech bubble," the only other period with a similar degree of awkward post-earnings price swings, the team led by Savita Subramanian said. The market famously slumped after the unconventional earnings season, suggesting today's trend may be a "harbinger of a market dip," they added.

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The analysts peg the atypical reactions to most earnings news already being priced in. Alpha from beats sits at 63%, signaling that macroeconomic factors and the upcoming presidential election overshadowed better-than-expected earnings, according to Bank of America.

Macro trends aside, companies guided for an extraordinarily encouraging end of the year. Bank of America's three-month guidance ratio, which tracks bullish versus bearish forecasts, climbed to a record 3.8x through the week. Its three-month earnings revision ratio leaped to its highest level since 2018. The share of above-consensus guidance reached its highest point in a decade, a stark reversal from recent quarters' lack of formal estimates.

This week is set to shift earnings reactions into a higher gear, with growth giants including Apple, Amazon, and Facebook all set to report. With mega-cap tech stocks holding a disproportionate weighting in major indexes, any misstep can add volatility to an already choppy pre-election trading week.

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