Price Increases from Earnings Beats Grow with Time

Given its pivotal role in the movement of financial markets, earnings season is a critical time for investors. One way to get a sense of the season’s market impact is to analyze the price reactions of company earnings results both in the short-term and the longer-term. Investors have always looked for ways to profit off of price movements during earnings season, so it’s important for them to understand:

• Short-term price impact of positive earnings surprises versus negative earnings surprise
• Trends in price impact changes when looking at a longer time window post-earnings release   

Here we analyze these points using the S&P Composite 1500 as its universe of companies.

Market Rewards Earnings Beats but Punishes Earnings Misses

On a short-term basis, how does the market react to upside and downside earnings surprises?

Over the past five years, companies in the S&P Composite 1500 that have reported positive earnings surprises have seen an average price increase of +1.6% one day prior to the earnings release through the close on the earnings release date. Over this same time frame, companies in the index that have reported negative earnings surprises have seen an average price decrease of -2.6% one day prior to the earnings release through the close on the earnings release date. The earnings release date or report date refers to the date when the information affects trading. Therefore, if a company reports in the after-market on a Tuesday, the price impact will calculate the percentage change in price from Tuesday’s close through Wednesday’s close. On average the market has rewarded earnings beats and punished earnings misses on a short-term basis over the past five years.

Related: S&P EPS Results Surprise, Sales Disappoint

Has this trend continued during Q1 2016? As of close on May 13, 89% of the companies in the S&P Composite 1500 have reported earnings for Q1 2016. To date, the market is rewarding positive earnings surprises at an average of +1.7%, just about in line with the 5-year average (+1.6%).  The market is also punishing negative earnings surprises at -3.6%, more than the 5-year average of -2.6%.

Price Increases from Earnings Beats Grow with Time

As mentioned above, history shows that on average the market will reward earnings beats and punish earnings misses in the short-term, but what does the price impact look like over longer time periods post-earnings release?

Looking back five years, companies in the S&P Composite 1500 that reported positive earnings surprises have seen average price increases as more days pass after the earnings release date. This is shown in the chart below. The 5-year average price increase was up +1.6% one day prior to the earnings release through the close on the earnings release date. This percentage grew to +2.0% fifteen days post-earnings, and then to +2.6% thirty days post-earnings. However, companies in the index that reported negative earnings surprises have seen average price decreases generally wane as more days pass after the earnings release date.

The 5-year average price decrease was -2.6% one day prior to the earnings release through the close on the earnings release date. This percentage dropped to -2.5% fifteen days post-earnings, and then to -2.0% thirty days post-earnings.

When we look over the past five years, the market on average appears to continue to reward the positive news of an upside earnings surprise, but seems to dismiss the negative news of a downside earnings surprise as time passes after the initial earnings report.