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S&P 500 Companies See Worst Price Reaction to Positive EPS Surprises since Q2 2011

Companies and Earnings

By John Butters  |  October 29, 2018

To date, almost half (48%) of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is above the five-year average of 71%. In aggregate, earnings have exceeded expectations by 6.5%, which is above the five-year average of 4.6%. Due to these positive EPS surprises, the earnings growth rate for the S&P 500 has improved to 22.5% today from 19.3% on September 30.

Given the strong performance of actual earnings relative to analyst estimates and the improvement in the earnings growth rate over the past few weeks, how has the market responded to positive EPS surprises during the Q3 earnings season?

SP 500 EPS Suprise Vs Avg Price Change

Companies in the S&P 500 that reported positive earnings surprises for Q3 have seen a decrease in price of 1.5% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported positive earnings surprises have witnessed a 1.0% increase in price on average during this four-day window.

If the final percentage for the quarter is -1.5%, it will mark the largest average price decline over this 4-day window for S&P 500 companies reporting positive EPS surprises since Q2 2011 (-2.1%).

SP 500 Positive EPS Suprises Avg Prive Change q211-q318

Why Is The Market Punishing Companies That Reported Positive Earnings Surprises?

It is likely not due to EPS guidance or analyst revisions to EPS estimates for the fourth quarter. To date, 63% (26 of 41) of the companies that have issued EPS guidance for Q4 have issued negative guidance. This percentage is below the 5-year average of 70%. In aggregate, analysts have made smaller cuts than average to fourth quarter EPS estimates during the month of October (with five days remaining in the month).

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John Butters

Senior Earnings Analyst

John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.

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