High-Beta Outperformance: Why Mid-October Matters for Aggressive Equity Trades

The week of Oct. 12 to 16 is the first busy week of the third-quarter earnings season, and according to academic research, it is one of the few periods in the year when riskier, high-beta stocks have tended to deliver the extra return that finance theory says they should. MarketWatch columnist Mark Hulbert highlighted the study ahead of the season.

What beta measures

Beta describes how much a stock tends to move relative to the overall market. High-beta stocks tend to gain the most when the market rises and lose the most when it falls. Low-beta stocks move the least in either direction.

The capital-asset pricing model, or CAPM, a foundation of academic finance, holds that high-beta stocks should outperform low-beta stocks on average at any time of the year, as compensation for their greater risk.

What the study found

The real world does not follow that theory most of the time, according to research by Terry Marsh, an emeritus finance professor at the University of California, Berkeley, and Kam Fong Chan, a finance professor at the University of Western Australia.

They found that high-beta stocks behave as the CAPM predicts, on average, during only one week each quarter: the first busy week of earnings season. In all other weeks, they found no statistically significant relationship between beta and return. In other words, outside that week, taking on more market risk has not, on average, been rewarded with higher returns.

The authors' explanation is that the first busy week is when investors learn more about the health of the economy than in all the other weeks of the quarter combined. The large companies that report that week depend on many other sectors and industries, so their results act as a broad read on the economy. Strong results from them are an especially good sign for the market, and weak results an especially bad one. In other weeks, company news says much less about the economy as a whole, and the link between beta and return largely disappears.

The first busy week usually falls in the second week after a quarter ends, when the first sizable group of large-cap companies reports. This quarter, those companies include JPMorgan Chase (JPM), UnitedHealth Group (UNH), Goldman Sachs (GS), Citigroup (C), Morgan Stanley (MS) and Taiwan Semiconductor Manufacturing (TSM).

Why it is not a sure bet

The finding describes an average across many quarters, not a forecast for this one. High-beta stocks do not automatically rise during the first busy week. If the earnings reported that week are strong, they are likely to do well. If results are unexpectedly poor, the same theory predicts they will do especially badly.

To show what high beta looks like in practice, Hulbert listed the highest-beta stocks among those recommended by at least two of the investment newsletters his firm, Hulbert Ratings, monitors. At the top were Affirm Holdings (AFRM), with a beta of 3.81, and Nvidia (NVDA), at 2.22, according to LSEG data. Several large banks also appear on the list, including Goldman Sachs at 1.28, Bank of America (BAC) at 1.21 and Morgan Stanley at 1.20.

MarketWatch's summary of the study does not give the size of the effect or the period it covers.

Bank, UnitedHealth and TSMC results open the season

• Results from the large banks, UnitedHealth and Taiwan Semiconductor, which make up the first broad read on third-quarter profits.
• Whether those reports beat or miss expectations, which, under the study's findings, matters most for how high-beta stocks perform.
• How high-beta stocks such as Nvidia and Affirm move relative to the broader market during the week.