Retail traders are driving off-the-charts volatility when companies release earnings

The increasing prominence of retail traders in dictating price action isn’t confined to just the world of meme stocks.

They’re also playing a key role in fueling how companies’ share prices behave at a time when every investor’s eyes are on them: upon the release of quarterly results.

“During this 2Q earnings season, retail investors frequently exhibited outsized trading behavior in stocks that experienced significant post-earnings price movements,” JPMorgan strategists led by Arun Jain wrote.

That is, substantial retail activity is associated with massive earnings reactions. The y-axis in the below chart tracks how many standard deviations JPM’s measure of retail buying is above or below its one-year average for a given stock.

But it’s not always the case that retail is contributing to (or creating) the obvious trend in response to earnings. Sometimes the crowd is coming in with both hands to catch a falling knife in stocks that nosedived after reporting quarterly results.

While retail’s favorite name to buy was still Palantir over the last week, per JPMorgan, Eli Lilly, The Trade Desk, and CoreWeave jumped to near the top of the leaderboard as they seemingly “provided compelling ‘buy-the-dip’ opportunities following disappointing announcements.”

As this has been playing out, Bespoke Investment Group observed that the typical (over?)reaction to earnings reports has been trending higher, reaching levels unseen outside of the global financial crisis.

“In the current day and age of easy, commission-free trading on brokerage apps available right on your smartphone, share-price volatility in reaction to stock-specific earnings news has moved increasingly higher,” analysts at Bespoke wrote. “At the same time, overall market volatility hasn’t seen a similar increase, which means that more and more of a stock’s overall performance is coming from the one trading day per quarter when it posts its financial results and forward guidance.”

So, in sum, retail traders are stepping up their activity in names that move on earnings at the same time that stocks are moving more than they used to on earnings!