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

To date, 95% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 77% have reported actual EPS above the mean EPS estimate, which is equal to the five-year average of 77%. In aggregate, earnings have exceeded estimates by 4.7%, which is below the five-year average of 8.9%. Given this performance relative to analyst expectations, how has the market responded to positive and negative EPS surprises reported by S&P 500 companies during the Q1 earnings season?

Negative Price Reactions to Positive EPS Surprises

To date, S&P 500 companies that have reported a positive EPS surprise have seen a negative price reaction on average.

Companies that have reported positive earnings surprises for Q1 2022 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 five-year average price increase of 0.8% 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 Q1 but witnessed a negative stock price reaction is Netflix. On April 19, the company reported actual EPS of $3.53 for Q1, which was well above the mean EPS estimate of $2.90. However, from April 15 to April 21, the stock price for Netflix decreased by 36.0% (to $218.22 from $341.13).

Large Negative Price Reactions to Negative EPS Surprises

In addition, S&P 500 companies that have reported negative EPS surprises have seen a much larger negative price reaction than average.

Companies that have reported negative earnings surprises for Q1 2022 have seen an average price decrease of 5.4% two days before the earnings release through two days after the earnings release. This percentage decrease is much larger than the five-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

In fact, if this is the final percentage for the quarter, it will mark the largest average negative price reaction to negative EPS surprises reported by S&P 500 companies for a quarter since Q2 2011 (-8.0%).

One example of a company that reported a negative EPS surprise in Q1 and saw a substantial negative stock price reaction is Under Armour. On May 6, the company reported actual EPS of -$0.01 for Q1, which was below the mean EPS estimate of $0.04. From May 4 to May 10, the stock price for Under Armour decreased by 33.5% (to $9.59 from $14.42).

Possible Explanations for the Overall Negative Price Reactions

Why is the market not rewarding positive EPS surprises and punishing negative EPS surprises more than average?

One factor may be that companies are beating estimates for Q1 2022 by a smaller margin than average compared to recent quarters. The earnings surprise percentage of 4.7% for Q1 is below both the five-year average of 8.9% and the 10-year average of 6.5%. If 4.7% is the final percentage for the quarter, it will mark the lowest earnings surprise percentage reported by the index since Q1 2020 (1.1%). Perhaps the market expected S&P 500 companies to report positive earnings surprises by similar margins as recent quarters.

Another factor may be that companies and analysts have been more negative in their outlooks and estimate revisions for Q2 2022 relative to recent quarters. In terms of earnings guidance from corporations, 70% of the S&P 500 companies (62 out of 88) that have issued EPS guidance for Q2 2022 have issued negative guidance. This percentage is above the five-year average of 60% and above the 10-year average of 67%.

In terms of revisions to EPS estimates, industry analysts have cut EPS estimates for S&P 500 companies for Q2 2022 by 1.0% in aggregate since March 31. While this decline is smaller than average, it also marks just the second time in the past eight quarters in which analysts have lowered earnings estimates in aggregate rather than increased earnings estimates in aggregate during a quarter. Perhaps, the market is responding more to the earnings outlook for the current quarter rather than the earnings performance of the prior quarter.

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