To date, more than 90% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 76% have reported actual EPS above the mean EPS estimate, which is above the five-year average of 72%. In aggregate, earnings have exceeded expectations by 5.4%, which is also above the five-year average of 4.8%.
Given the stronger performance of companies relative to analyst EPS estimates, how has the market responded to positive EPS surprises and negative EPS surprises during the Q1 earnings season?
The market has rewarded positive earnings surprises less than average and punished negative earnings surprises more than average during this earnings season.
Companies in the S&P 500 that have reported positive earnings surprises for Q1 have seen an increase in price of 0.7% 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 1.0% increase in price on average during this four-day window.
Companies in the S&P 500 that have reported negative earnings surprises for Q1 have seen a decrease in price of -3.5% 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 -2.5% on average during this four-day window.
Given this market reaction, it is interesting to note that companies and analysts have sent mixed signals to date on earnings expectations for the second quarter. In terms of earnings guidance from corporations, a higher percentage of S&P 500 companies have issued negative EPS guidance for Q2 2019 (80%) to date compared to the five-year average (70%). In terms of revisions to EPS estimates by industry analysts, the aggregate decline in estimated earnings over the first month of the second quarter (-1.0%) was smaller than the five-year (-1.7%), 10-year (-1.5%), and 15-year (-1.8%) average for the first month of a quarter. While more S&P 500 companies have issued negative EPS guidance for the second quarter than average, industry analysts have made smaller cuts to Q2 EPS estimates than average.