Wolfe Research warns that several major stocks, including Yum Brands, Nike, Chewy, Amazon, and Meta Platforms, are vulnerable to significant earnings disappointments due to low Earnings Quality (EQ) scores and other red flags. The firm’s proprietary EQ score, combined with factors like CFO changes, M&A activity, and reliance on non-GAAP earnings, suggests a choppy market where earnings misses could lead to substantial stock ‘blow-ups’. Investors are advised to be cautious amid the current uncertain macroeconomic environment.
Wolfe Research has identified several prominent market stocks that could face significant earnings disappointments, warning investors to exercise caution. The institutional brokerage firm anticipates that the stock market will continue to experience volatile trading conditions, exacerbated by an unpredictable macroeconomic climate. Chris Senyek, Wolfe Research's chief investment strategist, noted recently that "earnings disappointments may continue to cause a larger number of stock blow-ups, as we once again saw this past earnings season."
To pinpoint these vulnerable companies, Wolfe Research utilizes its proprietary Earnings Quality (EQ) score. This metric incorporates seven distinct financial ratios, alongside sentiment and valuation data, ranking companies on a scale from 0 (lowest quality) to 100 (highest quality). Their screening process focuses on companies with market capitalizations exceeding $4 billion that fall into the bottom 20% of earnings quality within their respective business sectors.
Beyond the EQ score, Wolfe Research highlights other critical red flags: a recent change in chief financial officer, ongoing mergers and acquisitions (M&A) activity, consistent reliance on non-GAAP earnings reporting, and potential undisclosed SEC investigations or inquiries, often indicated by the use of "B7A exemptions."
Key Stocks on Wolfe's 'Earnings Blow-Up' Watch List:
Yum Brands (EQ Score: 10): The parent company of Taco Bell, KFC, and Pizza Hut landed on Wolfe's low-earnings-quality screen. Analysts specifically pointed to its recent M&A activity and a change in CFO as additional warning signs. This assessment comes as Taco Bell has been grappling with the aftermath of a cyclospora outbreak linked to shredded iceberg lettuce, which impacted July sales. Yum Brands CEO Chris Turner confirmed in late July that while initial uncertainty affected consumer demand, trends began to improve as consumers recognized it as an industry-wide issue rather than one specific to Taco Bell.
Nike (EQ Score: 17): The athletic footwear and apparel giant also received a low-quality earnings assessment, with its CFO change cited as another negative risk factor. JPMorgan recently downgraded Nike to 'underweight' from 'neutral,' with analyst Matthew Boss predicting that Nike's "Win Now" turnaround strategy is likely to suppress financial results for the next few years. Boss elaborated that the financial repercussions of strategic decisions made through the end of calendar year 2026 will persist, affecting Nike's profit and loss through the second half of fiscal year 2027 and into fiscal year 2028. The company's reduction of its U.S. store footprint by approximately 10% is expected to impact financials until the closures are fully annualized, projected around July 2027.
Chewy (EQ Score: 2): The online pet supply retailer received an exceptionally low EQ score. Wolfe Research flagged Chewy for its M&A activity, a CFO change earlier this year, and a significant divergence between GAAP and non-GAAP earnings. Over the past 12 quarters, Chewy's non-GAAP earnings per share averaged 146% higher than its GAAP earnings, according to Wolfe. This warning precedes Chewy's fiscal second-quarter earnings release, scheduled before market open on Wednesday, September 9. The company is also expanding beyond its core retail operations, notably with its April announcement to acquire veterinary-clinic operator Modern Animal, a deal expected to contribute to earnings within its first year post-closing.
Amazon & Meta Platforms (EQ Score: 5 each): Wolfe's screen also identified these two technology megacap stocks as having low earnings quality scores.
