S&P 500 Companies See Best Price Reaction to Negative EPS Surprises in Nine Years

To date, almost 80% of the companies in the S&P 500 have reported earnings for the fourth quarter. Of these companies, 70% have reported actual EPS above the mean EPS estimate, which is slightly below the five-year average of 71%. In aggregate, earnings have exceeded expectations by 3.5%, which is below the five-year average of 4.8%. The earnings growth rate for the S&P 500 has improved by one percentage point since December 31 (to 13.1% from 12.1%), which is below the five-year average of a 3.8 percentage point improvement during an earnings season.

Given the below-average performance of actual earnings relative to analyst estimates and the below-average improvement in the earnings growth rate over the past few weeks, how has the market responded to negative EPS surprises during the Q4 earnings season?

Companies in the S&P 500 that have reported negative earnings surprises for Q4 have seen a decrease in price of 0.4% 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 negative earnings surprises have witnessed a 2.6% decrease in price on average during this four-day window.

If the final percentage for the quarter is -0.4%, it will mark the smallest average price decline over this four-day window for S&P 500 companies reporting negative EPS surprises since Q2 2009 (-0.2%).

Why isn’t the market punishing companies (on average) that have reported negative earnings surprises? It is likely not due to EPS guidance or analyst revisions to EPS estimates for the first quarter. To date, 76% (59 of 78) of the companies that have issued EPS guidance for Q4 have issued negative guidance. This percentage is above the five-year average of 71%. In aggregate, analysts have made larger cuts than average to first quarter EPS estimates (-5.8%) during the first half of the quarter.