Corporate earnings remain one of the major indicators of stock price performance. Reflected as earnings per share (EPS), the analysts and investors track the growth in actual EPS and also its numbers against the estimates. John Butters, Vice President and Senior Earnings Analyst at FactSet in a recent note says – To date, of those S&P 500 companies who have reported results, 75% have reported actual EPS above the mean EPS estimate, which is below the five-year average of 77%.
The stock market, however, has responded differently to positive and negative EPS surprises reported by S&P 500 companies during the Q2 earnings season.
One example of a company that reported a positive EPS surprise in Q2 and saw a substantial price increase is Netflix. On July 19, the company reported actual EPS of $3.20 for Q2, which was above the mean EPS estimate of $2.95. From July 15 to July 21, the stock price for Netflix increased by 18.4% (to $223.88 from $189.11). In addition, the market has not punished S&P 500 companies that have reported negative EPS surprises on average.
Companies that have reported negative earnings surprises for Q2 2022 have seen no price change (0.0%) on average two days before the earnings release through two days after the earnings release. This percentage is well above the five-year average price decrease of 2.4% during this same window for companies reporting negative earnings surprises.
One example of a company that reported a negative EPS surprise in Q2 but witnessed an increase in price is Amazon.com. On July 28, the company reported actual EPS of -$0.20 for Q2, which was well below the mean EPS estimate of $0.12. However, from July 26 to August 1, the stock price for Amazon.com increased by 17.9% (to $135.39 from $114.81).
One factor may be that S&P 500 companies have been less negative in their outlooks for the third quarter than average. In terms of earnings guidance, 58% of the S&P 500 companies (42 out of 72) that have issued EPS guidance for Q3 2022 have issued negative guidance. This percentage is below the five-year average of 60% and below the 10-year average of 67%. Perhaps, the market is responding more to the earnings outlook for the current quarter rather than the earnings performance of the prior quarter.