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

To date, 84% of the companies in the S&P 500 have reported earnings for the second quarter. Of these companies, 79% 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 73%. In aggregate, earnings have exceeded estimates by 7.2%, which is below the 5-year average of 8.4% but above the 10-year average of 6.4%. Given this strong performance relative to the 10-year averages, how has the market responded to positive EPS surprises reported by S&P 500 companies during the Q2 earnings season?

Companies that have reported positive earnings surprises for Q2 2023 have seen an average price decrease of 0.5% two days before the earnings release through two days after the earnings release. This percentage decrease is well below the 5-year average price increase of 1.0% 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 negative price reaction to positive EPS surprises reported by S&P 500 companies for a quarter since Q2 2011 (-2.1%).

One example of a company that reported a positive EPS surprise in Q2 but witnessed a negative stock price reaction is Tesla. On July 19, the company reported actual non-GAAP EPS of $0.91 for Q2, which was above the mean non-GAAP EPS estimate of $0.81. However, from July 17 to July 21, the stock price for Tesla decreased by 10.5% (to $260.02 from $290.38).

Why is the market punishing positive EPS surprises? It is likely not due to the earnings outlooks from companies and analysts for the third quarter, which have not been more negative than normal. In terms of earnings guidance from corporations, 62% of the S&P 500 companies (49 out of 79) that have issued EPS guidance for Q3 2023 have issued negative guidance. This percentage is between the 5-year average of 59% and the 10-year average of 64%. In terms of revisions to EPS estimates, industry analysts basically left EPS estimates for Q3 2023 unchanged in aggregate during the month of July. The bottom-up EPS estimate for Q3 only declined to $55.84 from $55.87 from June 30 to July 31.

The FactSet Earnings Insight report will not be published on August 11, August 18, and August 25. The next edition of the report will be published on September 1.

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