S&P 500 Companies See Largest Negative Price Reaction to Negative EPS Surprises Since 2011

To date, 81% of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 82% have reported actual EPS above the mean EPS estimate, which is above the 5-year average of 77% and above the 10-year average of 74%. In aggregate, earnings have exceeded estimates by 7.1%, which is below the 5-year average of 8.5% but above the 10-year average of 6.6%. Given this strong performance relative to the 10-year averages, how has the market responded to EPS surprises reported by S&P 500 companies during the Q3 earnings season?

Companies that have reported positive earnings surprises for Q3 2023 have seen an average price increase of 0.8% two days before the earnings release through two days after the earnings release. This percentage increase is slightly below the 5-year average price increase of 0.9% during this same window for companies reporting positive earnings surprises.

However, companies that have reported negative earnings surprises for Q3 2023 have seen an average price decrease of 5.2% two days before the earnings release through two days after the earnings release. This percentage decrease is much larger than the 5-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises. In fact, if this is the final percentage for the quarter, it will mark the largest average negative price reaction to negative EPS surprises reported by S&P 500 companies for a quarter since Q2 2011 (-8.0%).

One example of a company that reported a negative EPS surprise in Q3 and witnessed a significant decline in stock price is Tesla. On October 18, the company reported actual (non-GAAP) EPS of $0.66 for Q3, which was below the mean (non-GAAP) EPS estimate of $0.70. From October 16 to October 20, the stock price for Tesla decreased by 16.5%.

Why is the market punishing negative EPS surprises more than average? It may be related to downward revisions to EPS estimates for S&P 500 companies for Q4. Overall, analysts lowered EPS estimates for Q4 2023 by 3.9% during the month of October, which was a larger decline than average. Please see below for more details.

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