Investors Shouldn't Worry Too Much About Earnings Misses

Quarterly earnings often surprise the market more often than we think, so diversify, and focus on your goals.

Ian Tam, CFA 7 November, 2022 | 1:42AM
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Ian Tam: Over the most recent earnings season, a number of big-name tech companies, including Meta (META), Google (GOOGL) and Amazon (AMZN), missed their earnings expectations, resulting in downward pressure on the index, as well as a flurry of news activity. Now, aside from grabbing headlines, these companies are fairly important because together they make up about 7% of the S&P 500 Index and hence can indeed influence market movements.

So, what should investors do about these missed earnings? Well, for the most part, nothing, except for maybe recalling some key rules of disciplined investing. The first is to remember the reason we diversify across asset classes and geographies is to avoid stock-specific risk. You can see on the screen here the movement of Meta versus the index, and clearly, Meta or Facebook stock is much more volatile. Now, we've said in the past that diversification is really the only free lunch in investing because it gives you higher risk-adjusted returns over owning an individual security or a stock. So, sure, Meta has produced some exorbitant gains in the past, but holding a broad basket of stocks instead seems to have afforded better results, especially after accounting for market volatility.

The second thing you want to remember is that quarterly earnings often surprise the market more often than most people think. So, a case in point, if we look at the latest data, about 120 of the 500 stocks in the S&P 500 have actually missed their earnings expectations this last quarter. So, unless you are a momentum trader, focusing in on a single quarterly result, isn't often in your best interest.

Finally, I want to point out the fact that selling an investment locks in your losses and poses the additional challenge to determining when to get back into that stock, if that's what you want to do. Instead, maybe have a lookback and remember the objective reasons why you purchased that company in the first place and determine if those conditions still exist. If they do, holding onto that company and sticking with your investment thesis while focusing in on your long-term financial goals will not only help you keep your sanity, but instills a sense of discipline into your investment process.

For Morningstar, I'm Ian Tam.

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Ian Tam, CFA  Investment Specialist at Morningstar Canada. 


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