Market Rewarding Positive EPS Surprises More Than Average For S&P 500 Companies For Q3

To date, 91% of the companies in the S&P 500 have reported earnings for the third 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 1.8%, which is also below the 5-year average of 8.7% and below the 10-year average of 6.5%. 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 Q3 earnings season?

At this time, S&P 500 companies that have reported positive EPS surprises have seen a larger price increase than average.

Companies that have reported positive earnings surprises for Q3 2022 have seen an average price increase of 2.4% two days before the earnings release through two days after the earnings release. This percentage increase is much larger than the 5-year average price increase of 0.9% during this same window for companies reporting positive earnings surprises.

In fact, if this is the final percentage for the quarter, it will mark the largest average price increase for S&P 500 companies reporting positive EPS surprises for a quarter since Q3 2014 (+2.6%).

One example of a company that reported a positive EPS surprise in Q3 and saw a substantial price increase is Netflix. On October 18, the company reported actual EPS of $3.10 for Q3, which was above the mean EPS estimate of $2.14. From October 14 to October 20, the stock price for Netflix increased by 16.6% (to $268.16 from $230.00).

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

Companies that have reported negative earnings surprises for Q3 2022 have seen an average price decrease of -3.5% two days before the earnings release through two days after the earnings release. This percentage decline is larger 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 Q3 and witnessed a significant decrease in price is Meta Platforms. On October 26, the company reported actual EPS of $1.64 for Q3, which was below the mean EPS estimate of $1.90. From October 24 to October 28, the stock price for Meta Platforms decreased by 23.5% (to $99.20 from $129.72).

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