To date, almost 90% of the companies in the S&P 500 have reported earnings for the third quarter. Of these companies, 75% have reported actual EPS above the mean EPS estimate, which is above the five-year average of 72%. In aggregate, earnings have exceeded expectations by 3.8%, which is below the five-year average of 4.9%.
Given this mixed performance relative to recent averages, how has the market responded to positive EPS surprises during the Q3 earnings season?
Companies in the S&P 500 that have reported positive earnings surprises for Q3 have seen an increase in price of 2.3% 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. Thus, the market is rewarding positive EPS surprises more than average during the Q3 2019 earnings season.
If the final percentage for the quarter is +2.3%, it will mark the largest average price increase over this four-day window for S&P 500 companies reporting positive EPS surprises since Q3 2014 (+2.6%).
Why is the market rewarding companies (on average) that have reported positive earnings surprises? It is likely not due to EPS guidance or analyst revisions to EPS estimates for the fourth quarter. In terms of earnings guidance from corporations, a higher percentage of S&P 500 companies have issued negative EPS guidance for Q4 2019 to date (72%) compared to the five-year average (70%). In terms of revisions to EPS estimates, industry analysts made larger cuts to EPS estimates for Q4 2019 over the first month of the quarter (-2.9%) relative to the five-year (-1.7%), 10-year (-1.2%), and 15-year (-1.9%) averages for the first month of a quarter.
It is interesting to note that the market is also punishing negative EPS surprises less than average. Companies in the S&P 500 that have reported negative earnings surprises for Q3 have seen a decrease in price of -1.8% 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% increase in price on average during this four-day window.