(News Bulletin 247) – Last year, several tenants of the flagship index of the Parisian market recorded dizzying declines, such as Alstom or Worldline. The financial markets policeman looked into this increasingly recurring phenomenon as well as the causes of these stock market declines over the period 2013-2023.

Last year, investors broke out in a cold sweat during a particularly poor fall earnings season. Several residents of the CAC 40 have recorded numerous dizzying plunges, sanctioned for having disappointed either in their accounts or their prospects.

For example, Alstom plunged by almost 38% in one session in October 2023, after issuing a heavy warning about its cash generation. Worldline dropped 59% over one day, after having slashed its 2023 objectives and setting aside its outlook for 2024.

These spectacular price variations did not escape the Financial Markets Authority (AMF), which therefore looked into this phenomenon. In a study covering the period 2013-2023, the financial markets policeman returned to the characteristics of the phenomenon and its possible causes.

More spectacular sanctions than 10 years ago

The observation is clear, the study highlights a greater frequency in 2023 of cases of significant downward variations, that is to say declines of 10% or more. For 7 of them, the AMF identified 9 downward variations of 10% or more, after 3 variations in 2022 and 6 in 2021.

For comparison, over the period 2013-2017, the financial watchdog only observed 1 to 4 similar cases per year. Furthermore, the AMF’s analysis shows more violent price drops than before.

And above all, the AMF notes that for the 7 values ​​affected by these violent declines, they did not return to their levels before the drop in the weeks that followed.

“On the other hand, the liquidity of the securities does not appear to be degraded: the volumes traded do not show a significant drop during the following sessions and the depth of the order book (number of securities offered for purchase and sale) as well as the gap between the prices offered for purchase and those offered for sale remain stable,” the study continues.

Also, this phenomenon, which still remains rare, is not specific to the Parisian market, recalls the AMF, and also concerns other stocks listed in Europe and the United States. Indeed, this is not a French problem: the Dutch payments group Adyen, for example, fell by more than 40% on the Amsterdam Stock Exchange following disappointing results in the summer of 2023.

What can account for this nervousness in the market and the harshness of the sanctions imposed on companies that disappoint? The AMF puts forward elements of an explanation.

High valuations and concentrated performance

To determine the causes of these stock market declines, the AMF first studied the behavior of different market participants including short sellers, management companies and individual investors. And she comes to the following conclusion that none of “these categories of participants appear to be the main cause of the dropouts observed”. Then the financial markets policeman looked at the level of valuation and the performance of the market.

The study found that estimated price/earnings ratios per share in France, as in the United States, returned in 2023 to levels close to historic highs. “Consequently, bad news, such as the publication of financial results considered disappointing, may have been more sanctioned by the market,” says the study.

Also, the AMF has been pointing out for several years a concentration of performance on a few star stocks within the indices. This explains why investors seem to reward stocks judged to be performing more and penalize those that disappoint more severely.

In 2023, for example, 11 stocks in the pan-European Stoxx Europe 600 index alone represented 50% of the index’s gains, the study recalls. In fact, this trend results in a decorrelation of values ​​within the same index, concludes the AMF.