Overall, 446 companies in the S&P 500 have reported earnings to date for the second quarter. Of these 446 companies, 73% have reported actual EPS above the mean EPS estimate. This percentage is slightly above the trailing 1-year average (72%). In aggregate, companies are reporting earnings that are 4.2% above expectations, which is also above the trailing 1-year (+3.2%) average. As a result of these upside earnings surprises, the earnings growth rate for the S&P 500 has improved to 8.4% today from 4.9% on June 30 (see page 3 for more details). Given the stronger performance of companies relative to analyst estimates compared to recent quarters and the improvement in the growth rate over the past few weeks, how has the market responded to the companies reporting upside earnings surprises? Have these companies seen a larger increase in price after beating EPS estimates than normal?
The answer is actually no. Looking at the average change in the price of the stock two days before a company reported actual results through two days after a company reported actual results (4-day window), the market is not rewarding upside earnings surprises and is punishing downside earnings surprises more than normal during the Q2 earnings season.
Companies in the S&P 500 that have reported upside earnings surprises for Q2 2014 have seen an average decline in price of 0.1% during this 4-day window. Over the past five years, companies in the S&P 500 that have reported upside earnings surprises have witnessed a 1.0% increase in price on average during this window. Companies in the index that have reported downside earnings surprises for Q2 2014 have seen an average decline in price of 3.0% during this window. Over the past five years, companies in the index that have reported downside earnings surprises have recorded a 2.3% decrease in price on average during this window.