To date, 97% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 78% have reported actual EPS above the mean EPS estimate, which is the highest percentage since FactSet began tracking this data in Q3 2008. In aggregate, earnings have exceeded expectations by 7.5%, which is the highest surprise percentage since Q4 2010. Due to the number and magnitude of these positive EPS surprises, the earnings growth rate for the S&P 500 has improved to 24.6% today from 17.1% on March 31.
Given the stronger performance of companies relative to analyst EPS estimates and the improvement in the growth rate over the past several weeks, how has the market responded to upside EPS surprises during the Q1 earnings season?
Companies in the S&P 500 that reported positive earnings surprises for Q1 have seen an increase in price of 0.2% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive earnings surprises have witnessed a 1.1% increase in price on average during this four-day window.
The first quarter will mark the fifth straight quarter (Q1 2017 - Q1 2018) in which S&P 500 companies that reported positive EPS surprises recorded a price reaction on average that was below the five-year average. In both Q2 2017 and Q4 2017, the price reaction to positive EPS surprises was negative on average.
Why did the market not reward positive EPS surprises again during the first quarter earnings season? It was not due to forward EPS guidance or analyst revisions to EPS estimates for future periods. To date, fewer S&P 500 companies have issued negative EPS guidance for Q2 2018 (57) compared to the five-year average (79). In aggregate, analysts have increased EPS estimates slightly (+0.4%) for Q2 2018 to date. Typically, EPS estimates decline between 2.7% (five-year average) and 3.7% (10-year average) over the first two months of a quarter. Thus, both companies and analysts in aggregate have been more positive in their outlook for the second quarter than normal. EPS estimates for CY 2018 have also increased by 1.9% since March 31.