On the surface, the stock market has reacted positively to the start of the first-quarter corporate earnings season. And for good reason. With 11 percent of S&P 500 companies reporting earnings through Monday, Credit Suisse noted that 74 percent beat analysts' expectations by an average of 6 percent. Compare this to three-year averages of 68 percent and 4.7 percent, respectively.
This is largely as expected: Thanks to the tailwind from the corporate tax cut delivered by the Trump administration, stock analysts by now are looking for the companies in the S&P 500 to deliver earnings growth of 18.4 percent over last year's first quarter, up from their 12.2 percent forecast at the beginning of the year. This is the first upward revision to quarterly earnings estimates since 2010.
Yet key blue-chip stocks -- including Goldman Sachs (GS), IBM (IBM) and Bank of America (BAC) -- aren't playing along despite reporting better-than-expected results. They all suffered sell-offs in the wake of their quarterly reports. That looked even worse after Netflix (NFLX) shares rallied to a new record high on a 40 percent jump in revenues.
It's not for want of solid earnings. Applying the typical rate at which companies beat estimates, Credit Suisse is penciling in earnings-per-share growth of more than 22 percent for the S&P 500. Of this, 7 percent is attributable to the corporate tax cut (without which the growth rate would be 15.4 percent).
For bank stocks, one possible explanation for underperformance is that long-term interest rates have been drifting lower lately -- opposite of what the Federal Reserve is trying to engineer. That's raising concerns about "net interest margins" -- the gap between short-term and long-term rates that banks rely on for profitability. This key metric could shrink in coming quarters.
Also weighing on bank stocks is worry about credit quality, with JPMorgan (JPM) reporting an increase in credit card charge-offs, and mortgage activity, with Wells Fargo (WFC) showing weak numbers in that category.
For IBM, despite its solid top- and bottom-line numbers, traders focused on weak profit margins, the quality of revenues (less from cloud computing) and a cautious outlook from management.
The takeaway is that despite the tailwinds in play, Wall Street is still paying attention to the details. And investors will punish disappointments.