FactSet Research : S&P 500 Companies See Negative Price Reaction to Positive EPS Surprises in Q4

S&P 500 Companies See Negative Price Reaction to Positive EPS Surprises in Q4 Earnings

By John Butters| February 19, 2021

Overall, 83% of the companies in the S&P 500 have reported actual results for Q4 2020 to date. Of these companies, 79% have reported actual EPS above estimates, which is above the five-year average of 74%. If 79% is the final percentage for the quarter, it will mark the third-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. In aggregate, companies are reporting earnings that are 14.6% above the estimates, which is also above the five-year average of 6.3%. If 14.6% is the final percentage for the quarter, it will mark the fourth-largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008. Due to these positive EPS surprises, the index is now reporting year-over-year growth in earnings of 3.2% today compared to an estimated year-over-year decline in earnings of -9.3% back on December 31.

Given the unusually strong performance of actual earnings relative to analyst estimates and the improvement in the earnings growth rate over the past few weeks, how has the market responded to positive EPS surprises during the Q4 earnings season?

Companies that have reported positive earnings surprises for Q4 2020 have seen a decline in price of -0.1% on average 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% during this same window for companies reporting positive earnings surprises.

If the final percentage for the quarter is -0.1%, it will mark the first time the index has seen an average decrease in price (over this four-day window) for S&P 500 companies reporting positive EPS surprises since Q4 2019 (-0.2%).

Why is the market not 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 first quarter. To date, 63% (53 of 84) of the companies that have issued EPS guidance for Q1 have issued positive guidance. This percentage is well above the five-year average of 33%. In aggregate, analysts increased EPS estimates for Q1 by 3.5% during the month of January. This was the highest percentage increase in EPS estimates over the first month of a quarter since Q1 2018.

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