Overall, 455 companies in the S&P 500 have reported earnings to date for the third quarter. Of these 455 companies, 71% have reported actual EPS above the mean EPS estimate. This percentage is above the trailing five-year average (67%). In aggregate, companies have reported earnings that exceeded expectations by 6.5%, which is well above the trailing five-year (+4.4%) average. As a result of these upside earnings surprises, the earnings growth rate for the S&P 500 has improved from -2.2% on September 30 to 2.9% on November 11.
Given the stronger performance of companies relative to analyst estimates and the improvement in the growth rate over the past few weeks, how has the market responded to these upside earnings surprises? Have S&P 500 companies seen a larger increase in price than normal after beating EPS estimates?
The answer is actually no. Looking at the average change in the price of the stock two days before a company reported actual results through two days after a company reported actual results (four-day window), the market has rewarded upside earnings surprises less than average and has punished downside earnings surprises more than normal during the Q3 earnings season.
Companies in the S&P 500 that have reported upside earnings surprises for Q3 2016 have seen an average increase in price of 0.7% during this four-day window. Over the past five years, companies in the S&P 500 that have reported upside earnings surprises witnessed a 1.5% increase in price on average during this window.
Companies in the index that have reported downside earnings surprises for Q3 2016 have seen an average decline in price of 3.4% during this four-day window. Over the past five years, companies in the index that have reported downside earnings surprises have recorded a 2.2% decrease in price on average during this window.
It is important to note that the S&P 500 did see nine straight days of price declines from October 25 through November 4. During these nine days, about 300 of the 500 companies in the S&P 500 index reported actual results for the third quarter.
Article by John Butters, FactSet