Analyst Estimates, Surprises and Whisper Numbers

An earnings surprise happens when a company's reported results differ from what analysts expected. Beating expectations is called a positive surprise; falling short is a negative surprise, or a miss. Markets move on new information, and earnings surprises are one of the most important regular sources of it. But reactions are not simple: a company can beat and fall, or miss and rise, depending on guidance, quality of the beat and what investors were really expecting.

Measuring a surprise#

surprise % = (actual EPS - consensus EPS) / |consensus EPS|

Analysts also look at revenue surprises and standardised unexpected earnings (SUE), which scales the surprise by the historical variability of a company's earnings.

Why beats are so common#

Data from FactSet shows that, over long periods, around 70% to 78% of S&P 500 companies beat EPS estimates in a typical quarter. Reasons include:

• Conservative guidance: companies guide to numbers they expect to exceed.
• Analyst estimates drift down before results, a pattern called the "earnings walk down".
• Earnings management to meet or slightly beat targets.

Because beats are expected, a small beat may be treated as neutral, and a miss can be punished heavily.

What drives the reaction#

Asymmetric reactions#

Studies have found that stocks often react more strongly to misses than to beats of the same size, especially for richly valued growth companies. A high valuation assumes everything goes right; any disappointment can cause a large re rating. See Valuation Basics.

Post earnings drift#

Research going back decades has found that stocks with large positive surprises tend to keep outperforming for weeks after the announcement, and stocks with large negative surprises tend to keep underperforming. This post earnings announcement drift suggests markets do not fully absorb earnings news immediately. See Earnings Reactions and Post-Earnings Drift.

Trading earnings surprises#

• Before the report: options strategies to trade expected volatility. See Earnings Trading.
• After the report: gap and go or gap fade strategies. See Price Gaps and How to Trade Them.
• Drift strategies: buying strong positive surprises with strong price reactions and holding for weeks.
• Read across: a surprise at one company may signal results for peers or suppliers.

Surprise and estimate revisions#

After a surprise, analysts revise future estimates. Upward revisions after a beat often support continued price strength; a beat followed by cuts to future estimates (because of weak guidance) often leads to declines. Tracking revisions is as important as the surprise itself.

Frequently asked questions#

What is an earnings surprise?#

The difference between a company's reported earnings and the consensus estimate of analysts.

Why do stocks fall after beating earnings?#

Because of weak guidance, a low quality beat, a revenue miss or expectations that were already higher than consensus.

How often do companies beat earnings estimates?#

In recent decades, roughly 70% to 78% of S&P 500 companies have beaten EPS estimates in a typical quarter.

Next, learn why forward looking statements matter so much in Guidance and Earnings Revisions.