Market Is Punishing Negative EPS Surprises More Than Average for Q2

To date, 91% of the companies in the S&P 500 have reported earnings for the second quarter. Of these companies, 78% have reported actual EPS above the mean EPS estimate, which is above the 5-year average of 77% and above the 10-year average of 74%. In aggregate, earnings have exceeded estimates by 3.5%, which is below the 5-year average of 8.6% and below the 10-year average of 6.8%. Given this mixed performance relative to the averages, how has the market responded to EPS surprises reported by S&P 500 companies during the Q2 earnings season?

To date, the market is rewarding positive earnings surprises reported by S&P 500 companies less than average and punishing negative earnings surprises reported by S&P 500 companies more than average.

Companies that have reported positive earnings surprises for Q2 2024 have seen an average price increase of 0.8% two days before the earnings release through two days after the earnings release. This percentage increase is below the 5-year average price increase of 1.0% during this same window for companies reporting positive earnings surprises.

One example of a company that reported a positive EPS surprise in Q2 and witnessed a decline in stock price is Amazon.com. On August 1, the company reported actual (GAAP) EPS of $1.26 for Q2, which was above the mean (GAAP) EPS estimate of $1.03. However, from July 30 to August 5, the stock price for Amazon.com decreased by 11.4% (to $161.02 from $181.71).

Companies that have reported negative earnings surprises for Q2 2024 have seen an average price decrease of 3.8% two days before the earnings release through two days after the earnings release. This percentage decrease is larger than the 5-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.

One example of a company that reported a negative EPS surprise in Q2 and witnessed a significant decline in stock price is Ford Motor. On July 24, the company reported actual (non-GAAP) EPS of $0.47 for Q2, which was below the mean (non-GAAP) EPS estimate of $0.64. From July 22 to July 26, the stock price for Ford Motor decreased by 20.8% (to $11.19 from $14.12).

What is driving the market's below-average reaction to both positive and negative EPS surprises for Q2? It is likely not due to earnings guidance from companies or estimate revisions by analysts for the third quarter.

In terms of EPS guidance, the percentage of S&P 500 companies issuing negative EPS guidance for Q3 is below average. At this point in time, 86 companies in the index have issued EPS guidance for Q3 2024. Of these 86 companies, 47 have issued negative EPS guidance and 39 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q3 2024 is 55% (47 out of 86), which is below the 5-year average of 59% and below the 10-year average of 63%.

In terms of revisions to EPS estimates for S&P 500 companies, analysts lowered EPS estimates for Q3 2024 at average levels during the month of July. The Q3 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q3 for all the companies in the index) decreased by 1.8% (to $62.08 from $63.20) from June 30 to July 31. This decline was equal to the 5-year average, the 10-year average, and the 20-year average for the first month of a quarter. For more details, please see this article: Are Analysts Cutting EPS Estimates More Than Average for S&P 500 Companies for Q3?

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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