Market Punishing Negative EPS Surprises Less Than Average For S&P 500 Companies For Q4

To date, 69% of the companies in the S&P 500 have reported earnings for the fourth quarter. Of these companies, 69% have reported actual EPS above the mean EPS estimate, which is below the 5-year average of 77% and below the 10-year average of 73%. In aggregate, earnings have exceeded estimates by 1.1%, which is also below the 5-year average of 8.6% and below the 10-year average of 6.4%. Given this underperformance relative to recent averages, how has the market responded to positive and negative EPS surprises reported by S&P 500 companies during the Q4 earnings season?

S&P 500 companies that have reported positive EPS surprises have seen a slightly larger price increase than average.

Companies that have reported positive earnings surprises for Q4 2022 have seen an average price increase of 1.0% two days before the earnings release through two days after the earnings release. This percentage increase is slightly above the 5-year average price increase of 0.9% during this same window for companies reporting positive earnings surprises.

One example of a company that reported a positive EPS surprise in Q4 and saw a substantial price increase is Tesla. On January 25, the company reported actual (non-GAAP) EPS of $1.19 for Q4, which was above the mean (non-GAAP) EPS estimate of $1.12. From January 23 to January 27, the stock price for Tesla increased by 23.8% (to $177.90 from $143.75).

On the other hand, S&P 500 companies that have reported negative EPS surprises have seen a much smaller price decrease than average.

Companies that have reported negative earnings surprises for Q4 2022 have seen an average price decrease of -0.4% two days before the earnings release through two days after the earnings release. This percentage decline is smaller than the 5-year average price decrease of -2.2% during this same window for companies reporting negative earnings surprises.

One example of a company that reported a negative EPS surprise for Q4 and witnessed an increase in price is Meta Platforms. On February 1, the company reported actual (GAAP) EPS of $1.76 for Q4, which was below the mean (GAAP) EPS estimate of $2.26. From January 30 to February 3, the stock price for Meta Platforms increased by 26.8% (to $186.53 from $147.06).

Overall, 39% of the S&P 500 companies that have reported a negative EPS surprise for Q4 have seen a price increase two days before the earnings release through two days after the earnings release.

Why is the market rewarding positive earnings surprises slightly more than average and punishing negative EPS surprises much less than average?

It is likely not related to the earnings outlooks provided by companies and analysts during the Q4 earnings season for Q1 2023, which have been more negative than average. In terms of earnings guidance, 82% of the S&P 500 companies (58 out of 71) that have issued EPS guidance for Q1 2023 have issued negative guidance. This percentage is well above the 5-year average of 59% and the 10-year average of 67%. In terms of revisions to EPS estimates, analysts lowered EPS estimates for Q1 2023 for S&P 500 companies by 3.3% in aggregate during the month of January, which was larger than the 5-year average of -1.5% and the 10-year average of -1.8% for the first month of a quarter. For more details on estimate revisions, please go to: https://insight.factset.com/analysts-making-larger-cuts-than-average-to-eps-estimates-for-sp-500-companies-for-q1

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