Corporate earnings remain one of the most important indicators of stock price performance. Reflected as earnings per share (EPS), the analysts and investors track the growth of the actual EPS and also its numbers against the estimates. John Butters, Vice President and Senior Earnings Analyst at FactSet, said in a recent note: To date, 75% of the S&P 500 companies that have reported results have reported an actual EPS above the average EPS estimate, which is lower than the five-year average of 77%.
However, the stock market has reacted differently to positive and negative EPS surprises reported by S&P 500 companies during the second quarter earnings season.
An example of a company that reported positive second-quarter earnings per share and saw a substantial price increase is Netflix. On July 19, the company reported true second-quarter earnings per share of $3.20, which was higher than its average earnings per share of $2.95. From July 15 to July 21, the share price for Netflix rose 18.4% (from $189.11 to $223.88). In addition, the market has not penalized S&P 500 companies that have reported negative EPS surprises on average.
Companies that reported negative earnings surprises for the second quarter of 2022 saw no price change (0.0%) on average from two days before earnings announcement to two days after earnings announcement. This percentage is well above the five-year average price decline of 2.4% during the same period for companies that reported negative earnings surprises.
An example of a company that reported negative earnings per share in the second quarter but witnessed a price increase is Amazon.com. On July 28, the company reported an actual EPS of -$0.20 for the second quarter, which was well below the average EPS estimate of $0.12. However, from July 26 to August 1, the share price for Amazon.com rose 17.9% (from $114.81 to $135.39).
One factor could be that S&P 500 companies were less negative than average in their third quarter outlook. In terms of earnings expectations, 58% of the S&P 500 companies (42 out of 72) that issued EPS guidance for the third quarter of 2022 have issued a negative outlook. This percentage is below the five-year average of 60% and below the 10-year average of 67%. Perhaps the market is reacting more to the earnings outlook for the current quarter than to the earnings performance of the previous quarter.