S&P 500 Positive EPS Surprises Were Punished Pre-Election but Rewarded Post-Election

To date, 84% of S&P 500 companies have reported a positive EPS surprise for Q3 2020. Overall, the market is rewarding these positive earnings surprises at average levels. Companies that have reported positive earnings surprises for Q3 2020 have seen an average price increase of +0.9% two days before the earnings release through two days after the earnings release. This percentage increase is equal to the five-year average price increase of +0.9% during this same window for companies reporting positive earnings surprises.

However, there is a sharp difference in the price reactions for S&P 500 companies reporting positive EPS surprises before Election Day and after Election Day.

Prior to Election Day (Sep. 10 to Nov. 2), 86% of S&P 500 companies reported a positive EPS surprise. These companies saw an average price decrease of -0.6% 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 +0.9%. Facebook is an example of a company that reported a positive EPS surprise of 42.8% ($2.71 vs. $1.90) before Election Day but witnessed a negative price reaction of -7.7% (to $261.36 from $283.29) over this four-day window.

Including and after Election Day (Nov. 3 to Nov. 12), 78% of S&P 500 companies reported a positive EPS surprise. These companies saw an average price increase of +5.7% two days before the earnings release through two days after the earnings release. This percentage increase is well above the five-year average price increase of +0.9%. General Motors is an example of a company that reported a positive EPS surprise of 97.8% ($2.83 vs. $1.43) after Election Day and witnessed a positive price reaction of +10.2% (to $38.96 from $35.35) over this four-day window.

Although more S&P 500 companies beat EPS estimates (86% vs. 78%) prior to Election Day and beat EPS estimates by a wider median difference (+13.0% vs. +10.9%) prior to Election Day, the market punished positive EPS surprises before Election Day and rewarded positive EPS surprises more than average after Election Day. Thus, it appears the price movements for S&P 500 companies reporting positive EPS surprises were less related to earnings performance and more related to broader market themes such as the election (uncertainty before the election and more certainty after the election) and COVID-19 (rising cases before the election but news of potential vaccines after the election). 

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