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S&P 500 Companies See Worst Price Reaction to Positive EPS Surprises since 2nd Quarter 2011

Written by John Butters | Oct 30, 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?

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%).

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).