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According to FactSet, as of May 20, 2022, 95% of the companies in the S&P 500 index have reported earnings for the first calendar quarter that ran from January 1 through the end of March.
Of these companies, 77% have reported actual earnings per share above their respective mean estimate, which matches the five-year average of 77%. However, earnings have exceeded estimates by 4.7%, which is below the five-year average of 8.9%.
Furthermore, FactSet data indicates that, to date, S&P 500 companies that have reported a positive earnings surprise have seen a negative price reaction on average. For example, companies that have reported positive earnings surprises for the first quarter of 2022 have seen an average price decrease of 0.5% 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 0.8% during this same window for companies reporting positive earnings surprises.
If this is the final percentage for the quarter, it will mark the largest average negative price reaction to positive earnings surprises reported by S&P 500 companies for a quarter since the second quarter of 2011 (–2.1%).
One example of a company that reported a positive earnings surprise for its first quarter but saw a decline in share price is Netflix Inc. 
(NFLX). On April 19, the company reported actual earnings of $3.53 per share for its first fiscal quarter ended March 31, 2022. This was 22% above the consensus estimate for the quarter of $2.894 per share from 37 analysts. However, from April 15 to April 21, Netflix shares dropped 36.0% (from $341.13 to $218.22).
FactSet also reports that S&P 500 companies that have reported negative earnings surprises have seen a much larger negative price reaction than average. For example, companies that reported negative earnings surprises for the first quarter have seen an average price decrease of 5.4% two days before the earnings release and two days after the earnings release. This percentage decrease is much larger than the five-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises.
Suppose this is the final percentage for the quarter. In that case, it will mark the largest average negative price reaction to negative earnings surprises reported by S&P 500 companies for a quarter since the second quarter of 2011 (–8.0%).
FactSet postulates that one factor why the market is not rewarding positive earnings surprises more than average is that companies are beating estimates for the first quarter by a smaller margin than average compared to recent quarters. As a result, the earnings surprise percentage of 4.7% for the first quarter is below the five-year average of 8.9% and the 10-year average of 6.5%. If 4.7% is the final percentage for the quarter, according to FactSet, it will mark the lowest earnings surprise percentage reported by the index since the first quarter of 2020.
Expectations play a key role in price activity, especially in the short term, and perhaps the market expected S&P 500 companies to report positive earnings surprises by similar margins as recent quarters.
Changing expectations also play a role in stock price activity. As companies change their outlooks, investors change their expectations, leading to price adjustments. FactSet also points out that companies and analysts have been more negative in their outlooks and estimate revisions for the second quarter relative to recent quarters. Regarding earnings guidance from corporations, 70% of the S&P 500 companies (62 out of 88) that have issued earnings guidance for the second quarter running from the beginning of April through the end of June have issued negative guidance. This percentage is above the five-year average of 60% and above the 10-year average of 67%.
Among the 7,385 publicly traded companies in the A+ Investor database, 4,429 have at least one analyst providing an estimate for their current fiscal quarter. Of those, 3,677 have reported quarterly results since the beginning of April. Sixty percent (60.5%) have reported a positive earnings surprise, but only 38% reported earnings that exceeded the mean estimate by at least one standard deviation (a SUE score of at least 1.0).
By comparison, 36% of companies that have reported (1,581) had earnings that fell short of their consensus estimate, with 18% (793) missing their estimate by more than one standard deviation (SUE score of –1.0 or lower).
Out of the 4,429 companies that have reported since the beginning of April, 910 (20.5%) have seen analysts boost their mean estimates for the current fiscal quarter by at least 5% over the past month.
Stock prices of firms that significantly exceed analyst expectations (positive earnings surprise) tend to outperform the market, while those with negative surprises tend to underperform.
The impact of the earnings surprise is longer lasting than most would think. The most significant effect of the surprise can be seen immediately, but the impact of the surprise may be felt for as long as a year. The effect tends to last longer for negative earnings surprises. It simply takes time for the market to recognize that a fundamental shift is taking place. This means that it does not generally make sense to be a bargain hunter and buy a stock after the initial price decline on a negative earnings surprise. There is a good chance the stock will continue to underperform the market for some time. It may not be too late to buy into an attractive stock after a better-than-expected earnings report is released, provided the fundamentals are still valid.
Large firms tend to adjust to surprises faster than small firms. As a result, more investors follow larger firms, analysts and portfolio managers who act on the information quickly and thoroughly.
Changes in estimates reflect analyst expectations of future performance changes and lead to price adjustments similar to earnings surprises. When earnings estimates are revised significantly upward—5% or more—stocks tend to show above-average performance. Conversely, stock prices of firms with downward revisions show below-market performance.
Changes in analyst estimates are more meaningful when individual estimates move away from the average rather than toward the consensus.
A+ Investor subscribers have exclusive access to A+ Stock Grades for more than 7,000 stocks for factors of value, growth, momentum, quality and estimate revisions. The estimate revisions grade ranks companies by the statistical strength of their two latest quarterly earnings surprises and earnings revisions for the current fiscal year over the last month and three months.
Earnings estimates are a critical element to consider as investors look for stock ideas and manage their holdings.
Using the A+ Stock Grades Screener, you can isolate those companies that grade highly based on earnings estimates (along with growth, value, momentum and quality).
Now that we are nearing the end of the current earnings season, we can identify companies with strong (or weak) earnings surprises and those seeing their consensus estimates revised (upward or downward).
The A+ Stock Grades Screener allows you to filter for stocks with specific factor grades. As of the close on May 20, 2022, there were 308 stocks out of the universe of 7,385 companies with an estimate revisions grade of A.
However, this is still a large universe of companies to sift through. To begin narrowing down the universe even further, I first applied a filter of an A grade for quality. Currently, 1,188 companies in the A+ universe have a Quality Grade of A, while 67 have A grades for revisions and quality.
Research from David Dreman and others shows that deep-value companies respond more favorably to significant positive earnings surprises and react less adversely to negative earnings surprises. Therefore, the next filter I apply looks for a value grade of A. This lowered the number of passing companies down to 24.
To identify stocks with strong earnings surprises and upward estimate revisions exhibiting strong relative price strength, I also screened for stocks with an A+ Momentum Grade of A. This lowered the number of passing companies to 14.
All 14 of these companies also had a C or better growth grade.
This table shows the top 10 of the 14 passing companies based on their estimate revisions score.
Five of the 14 companies passing the stock grades filters have A grades across all five A+ factor grades: factors: BlueLinx Holdings Inc. (BCX), Boise Cascade Co. (BCC), Builders FirstSource Inc. (BLDR), Encore Wire Corp. (WIRE) and Transportada de Gas del Sure SA (TGS) (note that not all of them appear in the figure above).
Encore Wire had the second-highest estimate revisions score among the final 14 companies at 94, but had the most attractive Value, Growth, Momentum and Quality scores.
Clicking on the ticker for Encore Wire takes us to its Stock Evaluator page. Clicking on the Grades tab takes us to a detailed explanation of each of the five factor grades. For this example, we focus on Encore Wire’s estimate revisions grade:
Encore Wire has an overall Estimate Revisions Score of 94, which is very positive and translates into an A grade. This grade is arrived at by using four different pieces of data:
To say that a company missed or exceeded its quarterly consensus estimate does not necessarily capture the real significance of such an event. There are several ways of measuring the significance of an earnings surprise. One method of measuring the magnitude or significance of earnings surprises is the standardized unexpected earnings (SUE) score. SUE measures the earnings surprise in terms of its number of standard deviations above or below the consensus earnings estimate.
An earnings surprise is considered more significant the farther it is outside the statistical range of estimates expected at the time of the announcement. Assuming a normal distribution of earnings estimates, 68.2% of actual earnings will be within one standard deviation of the consensus estimate, 95.4% within two standard deviations and 99.7% within three standard deviations. The absolute value of SUE measures the degree of unexpected earnings. There is no earnings surprise when the SUE score equals zero; the actual earnings per share is in line with the consensus earnings estimate.
The standard deviation of Encore Wire’s estimates for its quarter ended March 31, 2022, was $0.56. The two analysts tracking the company and polled by I/B/E/S were expecting earnings of $2.94 per share. Still, the company ended up reporting earnings of $7.96 per share. Dividing the difference between the estimates and actual earnings ($7.96 – $2.94) by the standard deviation of the estimates ($0.56), we arrive at a highly statistically significant SUE score of 9.0 for the latest quarter. The SUE score for the quarter ending December 31, 2021, was also significant with a SUE score of 5.0.
The consensus earnings estimate for Encore Wire’s current fiscal year ending in December stood at $20.905 per share of as May 20. One month ago, analysts were forecasting earnings $10.373 per share for the year. The company reported on April 28 and over the past three weeks the estimate has jumped more than 100%. Three months ago, the estimate for the current fiscal year was $14.595 per share, which translates into a three-month increase of more than 43%.
The “raw” values of the four metrics used for the estimate revisions grade are then converted to percentile ranks, which compare them against all of the stocks in the universe. Encore Wire’s SUE score for the latest quarter of 9.0 ranks in the 94th percentile among the more than 7,000 stocks in the A+ Investor stock universe, while the 5.0 SUE score from the previous quarter ranks in the 86th percentile.
The percentage changes in the current year’s consensus estimate over the last month and three months rank in the 99th and 98th percentiles, respectively. The percentile ranks for the four underlying metrics are then averaged; for Encore Wire, this translates into an Estimate Revisions Score of 94, which places it in the A, or very positive, grade range.
While investing in companies seeing significant upward earnings revisions has been shown to generate promising results over the long term, it is essential to consider elements of financial strength, quality or price momentum. As an A+ Investor, you can evaluate the estimate revisions of individual stocks, but you can also use the Stock Grades Screener to isolate those companies with high estimate revisions scores along with elements of growth, momentum, quality and value.
Recently, we added new features to My Portfolio for AAII members and A+ Investor and Platinum subscribers. A+ Investor users can now set up alerts for price activity and changes to A+ Stock Grades. Click here for the more information on these alerts.
The Grade Alerts tool allows A+ Investor and Platinum subscribers to track daily grade changes for stocks that you follow in portfolios you created with My Portfolio. These grades are only for stocks in the A+ Investor stock universe. There are no grade alerts for mutual funds or exchange-traded funds (ETFs).
The Grade Alerts are triggered if stocks in the portfolio(s) you specify meet the grade-change criteria you set up. Like with the price alerts, these alerts are posted online at the My Portfolio area of the AAII website by going to the My Alerts section and selecting the Grade Alerts tab. In addition, we are working on a daily email that will alert you if any of your stock holdings have grade actions that pass your custom alert rules. My Portfolio grade changes are updated daily around 9:00 a.m. (Central), Tuesday through Saturday.
For this example, the Grade Alerts can notify you when a company you track sees an upward or downward change in its estimate revisions grade. In addition, subscribers can define custom grade alert settings for stocks added to My Portfolio by clicking on the My Alerts tab of My Portfolio. The user can define grade changes (up or down) for the five grade investment factors (value, growth, momentum, earnings estimate revisions and quality). For each of these five investment factors, A+ Investor subscribers can select to view grade changes (up or down) for one grade change, two grade changes, three grade changes and four grade changes.
With the desired grade alert settings selected, you can view a summary of your stocks that meet your grade alert settings by clicking on My Alerts at the top of the page, then choosing the Grade Alerts tab. The up or down arrow next to the grade letter shows you the direction of the change in grade.
