To date, 90% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 65% have reported actual EPS above the mean EPS estimate, which is below the five-year average of 73%. In aggregate, earnings have exceeded estimates by 2.1%, which is also below the five-year average of 4.9%.
Given the weaker performance of companies relative to analyst expectations, how has the market responded to negative EPS surprises reported by S&P 500 companies during the Q1 earnings season?
The market has actually punished negative earnings surprises less than average during this earnings season.
Companies in the S&P 500 that have reported negative earnings surprises for Q1 have seen a decrease in price of 1.1% 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 negative earnings surprises have witnessed a decrease in price of 2.8% on average during this four-day window.
One example of a company that reported a negative EPS surprise in Q1 but did not see a negative stock price reaction is Facebook. On April 29, the company reported actual EPS of $1.71 for Q1, which was below the mean EPS estimate of $1.74. However, from April 27 to May 1, the stock price for Facebook increased by 7.9% (to $202.27 from $187.50).
Why is the market punishing companies that have reported negative earnings surprises less than average? It is likely not due to company guidance or analyst revisions to EPS estimates for the second quarter, as both of these metrics are showing more uncertainty or negative sentiment than normal. In terms of earnings guidance from corporations, a much smaller number of S&P 500 companies are providing EPS guidance for Q2 (35) compared to the five-year average for a quarter (107). In terms of revisions to EPS estimates, industry analysts made the largest cuts to EPS estimates for S&P 500 companies during the first month of a quarter for Q2 2020 (-29.1%) since FactSet began tracking this data in 2002. Please see our May 6 FactSet Insight article for more details on downward revisions to EPS estimates in Q2.