Market Is Punishing Negative EPS Surprises More Than Average for Q3

To date, 91% of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, which is below the 5-year average of 77% but equal to the 10-year average of 75%. In aggregate, earnings have exceeded estimates by 4.3%, which is below the 5-year average of 8.5% and below the 10-year average of 6.8%. Given this mixed performance relative to the averages, how has the market responded to EPS surprises reported by S&P 500 companies during the Q3 earnings season?

To date, the market is rewarding positive earnings surprises reported by S&P 500 companies more than average for the third quarter.

Companies that have reported positive earnings surprises for Q3 2024 have seen an average price increase of 1.3% two days before the earnings release through two days after the earnings release. This percentage increase is larger than the 5-year average price increase of 1.0% during this same window for companies reporting positive earnings surprises.

One example of a company that reported a positive EPS surprise for Q3 and witnessed a significant increase in stock price is Tesla. On October 19, the company reported actual (non-GAAP) EPS of $0.72 for Q3, which was above the mean (non-GAAP) EPS estimate of $0.59. From October 21 to October 23, the stock price for Tesla increased by 23.0% (to $269.19 from $218.85).

However, the market is also punishing negative earnings surprises reported by S&P 500 companies more than average for the third quarter.

Companies that have reported negative earnings surprises for Q3 2024 have seen an average price decrease of 2.9% two days before the earnings release through two days after the earnings release. This percentage decrease is larger than the 5-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

If -2.9% is the final average price change for the quarter, this will mark the third consecutive quarter in which companies reporting negative EPS surprises have seen a larger price decrease than average.

One example of a company that reported a negative EPS surprise in Q3 and witnessed a significant decline in stock price is FedEx. On September 19, the company reported actual (non-GAAP) EPS of $3.60 for Q3, which was below the mean (non-GAAP) EPS estimate of $4.40. From September 17 to September 23, the stock price for FedEx decreased by 13.0% (to $258.79 from $297.34).

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