Earnings season is in full swing, and Wall Street has a clear message to companies: Good just isn’t good enough.
Market action this week reinforced that growing thesis, with big banks like JPMorgan (JPM) and Bank of America (BAC) ending the week with muted gains despite solid earnings and a message of consumer resilience.
Netflix (NFLX), which currently trades at roughly 40 times forward earnings, a steep premium to the broader market and even many of its tech peers, faced an even sharper reaction. Shares fell 5% on Friday despite the streaming giant reporting a beat on both the top and bottom lines and raising its full-year guidance.
“An overall ‘good’ set of results and guide were not good enough for elevated expectations,” William Blair analyst Ralph Schackart wrote in a reaction to the Netflix report.
That disconnect between performance and price reaction isn’t isolated. As earnings season ramps up, the broader market is contending with elevated valuations and a growing sense that even strong results may not be enough to justify current levels.
“The biggest risk right now is valuation,” Brian Jacobsen, chief economist at Annex Wealth Management, told Yahoo Finance on Friday. “When we look at the fundamentals, I think that those will be improving. But how much are you paying for those fundamentals?”
Companies entered this earnings season with lowered expectations, shaped by growing uncertainties around tariffs, policy, and the path of interest rates.
According to FactSet, analysts initially projected just under 5% earnings growth for the S&P 500 (^GSPC) in the second quarter. That estimate rose to 5.6% on Friday as more companies reported stronger-than-expected results. If that number holds, it would still mark the slowest pace of profit growth since Q4 2023.
So far, 83% of S&P 500 companies that have reported topped second quarter EPS estimates, above the five-year average of 78%. Still, the average earnings surprise of 7.9% lags the five-year norm of 9.1%.
And with a relatively easy bar to clear, strategists warn that investors are showing little patience for any stumbles.
“I expect that we’re going to be seeing a lot of volatility,” Jacobsen said. “Earnings misses are going to get punished a lot more than usual. I don’t think investors have the patience to really deal with companies that are missing any of those estimates.”
Stocks are currently trading at record highs after staging a historic comeback since Trump’s initial “Liberation Day” tariff threats in April, which briefly triggered a sharp sell-off after he pledged sweeping duties on some of the US’s largest trading partners. The White House later softened its stance, first granting a 90-day extension and then pushing the deadline again to Aug. 1.
That walk-back fueled a familiar narrative on Wall Street — the so-called TACO trade, an acronym for “Trump Always Chickens Out.” The phrase captures a belief among some investors that the president often talks tough on tariffs but rarely follows through. That assumption has helped fuel a tailwind for markets in recent months as traders increasingly bet on last-minute policy pivots.
But even as markets rally on hopes of policy reversals, the underlying uncertainty hasn’t gone away.
Mark Malek, chief investment officer at Siebert Financial, told Yahoo Finance on Friday that as earnings season continues, investors will have a clearer view of how tariff-sensitive industries are holding up in this environment.
“All the flags are heading in the right direction — for now,” he said, emphasizing the uncertainty heading into the next wave of earnings.
“We know [tariff-related inflation] is going to be a headwind. Either it’s going to cost corporations in earnings or it’s going to come right to the consumer,” he said. “The market’s trying to trying to digest all of this, and so far it’s done a good job. But I think there’s another shoe to drop soon.”
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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