What's fueling this reporting season's wild swings?

The first week of February's reporting season has already delivered some fascinating market behaviour, with two large-cap companies experiencing dramatic price swings on their results days. Both stocks reported better-than-expected earnings but experienced heavy selling pressure in early trade before staging remarkable recoveries to close in positive territory.

It’s still early, but if this pattern continues, it could set the tone for the rest of the reporting season.

Setting the scene

The S&P/ASX 200 has rallied to record levels, gaining 3.7% year-to-date and up 12.2% in the past twelve months.

However, this rally comes against a backdrop of declining earnings, with Citi's analysis showing that ASX 200 aggregate earnings fell 3.3% in FY24, primarily due to weaker bank performance and falling commodity prices. This divergence between valuations and earnings creates potential vulnerability for certain stocks and sectors.

Pinnacle's big beat

The first week of reporting season tends to be pretty quiet. But two high-flying companies have flagged some rather peculiar price action.

Pinnacle Investment Management (ASX: PNI) a multi-affiliate investment management firm, has been one of the best-performing large caps, with its shares up almost 140% in the past year.

Pinnacle price chart (top) and price-to-earnings (bottom) | Source: TradingView

Pinnacle reported a strong first-half FY25 result on Wednesday, including:

• Net profit after tax up 151% to $75.7 million

• Diluted earnings per share up 140% to 36.7 cents

• Interim dividend up 112% to 33 cents per share

• Aggregate funds under management to $155.4 billion, up 41.1% compared to the prior half

Despite beating consensus net profit expectations by 20%, Pinnacle's share price took investors on a wild ride. After opening around 6% higher, the stock plunged into negative territory within 30 minutes, falling 4.5% before gradually recovering to close up 3.4%.

Volatility drivers

Back in February 2024, Pinnacle also reported a big earnings beat. The stock opened 2.5% higher on results day and finished the session up 8.6% – a stark contrast to today's price action.

The contrasting market reactions make sense in context. Two years ago, Pinnacle traded at a more modest price-to-earnings of 25x and had moved sideways for years, giving investors room for optimism. Today, despite the impressive earnings growth, the stock commands a much steeper multiple of 53x– a valuation that leaves little margin for error.

In addition, Pinnacle raised $400 million last November at $20.30 per share to fund strategic investments in its new affiliates VSS Capital and Pacific Asset Management. Heading into the result, those new shares were up around 24%, creating a liquidity event for those investors to lock in profits.

REA Group tops lofty expectations

REA Group (ASX: REA) also reported a solid beat across most key metrics for 1H25.

• Revenue up 20.3% to $873 million (2.3% beat vs. consensus)

• NPAT up 25.8% to $314 million (2.1% beat vs. consensus)

• Earnings per share up 25.9% to 238 cps (2.5% beat vs. consensus)

• Dividend per share up 26.4% to 110 cps (4.2% miss vs. consensus)

Despite beating consensus estimates on most metrics, REA's shares initially dropped 2.3% at the open and fell as much as 4.1% before recovering into positive territory by midday.

The mixed reaction can be attributed to several factors such as a lower-than-expected dividend, the announced retirement of CEO Owen Wilson after six years, and the company's elevated valuation at 109x earnings - its highest level in almost four years.

REA Group price chart (top) and price-to-earnings (bottom) | Source: TradingView

The Bottom Line

The early days of reporting season reveal a market caught between two forces. While companies are delivering results that exceed expectations, investors seem initially hesitant to reward even the strongest performers – likely due to their already stretched valuations.

So far, it appears that investors are electing to take profits and/or sell into strength. But once the dust settles, buyers step in to support these stocks, perhaps reassured by the fundamental strength of their results.