Stocks are getting punished more than usual for missing Wall Street estimates

Stocks that missed Wall Street’s earnings-per-share expectations sold off with the biggest drop since 2011.

Data released by FactSet on Tuesday shows that, on average, S&P 500 companies that announced weaker-than-expected third-quarter earnings per share saw their shares fall by 5.2% over the following two days, on average. This is more than double the five-year average and is the worst performance since shares fell 8% over the next two days in the second quarter of 2011.

“Investors aren’t praising every stock out there,” Callie Cox, investment analyst at eToro US, told Yahoo Finance Live. “They’re focusing on fundamentals and trying to understand what’s advantageous and what’s not in a high rate environment.

The trend was evident in the market on Wednesday, particularly among the stocks that top Yahoo Finance’s trends page. Warner Bros. Discovery (WBD), Toast (TOST) and Upstart Holdings (UPST) were all down by mid-day, with each stock losing up to 16% over the course of the session.

For Cox, this market development shows that investors are becoming more selective, focusing on companies that could be most affected by the Fed’s stance on “higher interest rates for longer”.

One such company is AI lending platform Upstart. The company posted a loss per share of $0.05 in the last quarter, higher than the $0.02 loss expected by Wall Street analysts. In addition, Upstart’s sales fell by 14% compared with the same quarter a year earlier, and its sales forecasts for the next quarter were below Wall Street expectations.

“In the third quarter, rates were at an all-time high in our market, higher than we had anticipated, reflecting both decades of high interest rates and significantly increased risk in the consumer economy,” Upstart CEO David Girouard said on the company’s earnings conference call Tuesday evening. “It’s not the path we would have chosen, and it’s obviously not constructive for our growth, but it reflects the reality of operating responsibly in this environment.

Upstart gained more than 400% at one point in the year, amid the AI exuberance of 2023, but has since fallen sharply, with its shares losing nearly 30% on Wednesday alone, compared with a gain of around 60% for the year as a whole.

Upstart is part of the Russell 2000 Index (^RUT), which has lagged 2023 due to concerns about the impact of rising interest rates on small companies in the growth phase. The small-cap index fell by more than 1.2% on Wednesday.

“As an investor, it’s important to understand the type of risk you’re taking, because companies are being hit hard by rising interest rates, especially speculative small companies, and this is reflected in events such as earnings and management calls,” Cox said. “The effects [of rising interest rates] are becoming more obvious.