During the second quarter, investors had a disjointed focus. Stocks that missed earnings estimates were hard hit, but those that beat Wall Street’s prognostications were not rewarded to the same degree, quantitative analysis from Morgan Stanley shows. When profit margins grew and earnings beats, investors yawned. But woe is the corporate manager who downplays future guidance, as their stock price was hard hit in the second quarter.

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earnings beats

Investors looking ahead of earnings beats to the third quarter and punishing stocks that don't deliver positive guidance

Second quarter earnings are expected to be 12.1% ahead on a year over year basis, Thompson Reuters analysis shows. What’s more, stocks are noticeably beating their estimates, with 73.6% reporting earnings above analyst expectations, which is nearly 1000 basis points above the long term average and beats the second quarter percentage by 26 basis points.

Aggregate earnings are tracking 5.4% ahead of consensus, and earnings per share growth of 10.7% (estimates and actual) are the second highest since the third quarter of 2011. Revenue Growth for the second quarter 2017is at 6%, which represents the second highest it has been since the first quarter of 2012, a benchmark driven in large part by energy, which was expected.

While companies continue to guide sell-side analysts lower -- and are punished for it – fewer are doing so in the second quarter than is typically the case. Morgan Stanley points out the ratio of negative-to-positive guidance for the third quarter 2017 is 1.75x, well below the 2.6x average.

But such strong performance is being taken for granted, Morgan Stanley’s Brian Hayes and his equity quantitative reach team surmise in an August 29 report. “Investor reaction to revenue surprises was more skewed to the downside than it was for earnings beats and misses,” the report opined. The typical earnings beat was rewarded with 30 basis points of positive price appreciation, but missing the revenue estimate resulted in a 90 basis point underperformance.

Earnings beats are expanding at a strong clip, but investors are yawning, as Energy and Real Estate sectors show strong forward guidance

Growth stocks were hardest hit as they underperformed other styles on both earnings beats and misses, a turnaround as growth had been outperforming value for most of the year – and a potential indication of a shifting market environment. The spread on value stocks beating and missing their earnings estimates was only 10 basis points by comparison.

Noting that “earnings results mattered more than revenue results,” the report pointed to a strong quarter for margin expansion.

Considering the 412 non-financial stocks who reported in the quarter, net margins grew for 252, or 62%, but despite year over year and quarter over quarter gains, the investors yawned. “The market has not rewarded companies for margin expansion,” the report observed, pointing to the median stock being down 3 days after reporting regardless of margin results.

Earnings revisions were meaningfully higher for Utilities, Technology, and the Energy sector while Financials, Discretionary and Staples stocks were lower. Materials stocks surprised above estimates the most, with 60% beating estimates, followed by Energy and Information Technology Stocks. Those reporting the least number of upside surprises includes Telecom Services and Consumer Staples.

Going forward, incremental margins are expected to rise in Real Estate by 39.2% in 2017 and 62.1% in 2018 after dropping 39.7% in 2016. Other notable sectors expected to close out 2017 strong include Materials, with 33.4% and Technology with 28.7%.

Earnings growth for energy stocks is estimated to end 2017 at a strong 204.7% clip after seeing a decline of -74.1% in 2016, the highest standard deviation in performance by a wide margin. The S&P 500, by contrast, is expected to see 2017 earnings growth at 10.9% after witnessing a modest 0.5% growth rate in 2016.