Three out of four companies are topping Wall Street's estimates this earnings season, but investors don't seem to care this time and that's a bad sign for the market.
While share prices initially react strongly to news of a beat at the open, the stocks are being sold harshly throughout the day, according to research from Bespoke Investment Group.
Shares of companies that beat are being sold and stocks that dare miss are being punished even more harshly, according to Bespoke.
"Based on how stock prices are reacting to earnings right now, 'earnings strength' should be replaced with 'earnings stink,'" Justin Walters, co-founder of Bespoke Investment Group, said in an email to clients Wednesday.
Investors want clear and optimistic forecasts for the rest of this year from companies and they simply aren't getting that. It's not enough to top Wall Street's notoriously low estimates.
The EPS beat rate stands at 76.7 percent this quarter, and the average stock that has reported first quarter numbers so far opened higher by almost half a percent afterwards, according to Walters. At one point the beat rate was as high as 80 percent, a record, according to Bespoke.
Following the "initial pump fake higher at the open" though, Bespoke notes, things have turned ugly.
The average stock that has reported traded 0.81 percent lower from the open to the close of trading this season. When combined with that initial rise, the average full-day change for stocks that have reported is -0.34 percent, according to the research.
Average one-day price reaction to earnings this season
Source: Bespoke Investment Group
Caterpillar was a prime example of that whiplash this week.
The industrial company, which is often seen as a bellwether for the U.S. economy, handily beat analysts' expectations in its first-quarter earnings report Tuesday. Shares opened in the green following the report, but later dropped 10 percent after bearish comments by Caterpillar management.
On the call, the company said its first-quarter profit will be "the high-water mark for the year" because of higher investment spending.
From a macro perspective, traders selling after the initial gap at the open is a bearish signal, Walters said.
"Given this backdrop, we would certainly avoid chasing any stocks that are initially trading higher on earnings," Walters said. "The one saving grace is that it is still relatively early in the reporting period, so there's still time for the trend to turn around."