Through Thursday morning, 549 companies had reported Q4 2021 numbers since the current earnings season began the week of Jan. 10th-14th. While it may seem like stocks have been extremely volatile on their earnings reaction days this season due to a number of high-profile names seeing extreme one-day moves, on average, earnings-day volatility has actually been lower than normal. Over the last ten years, the average stock that has reported earnings has seen an absolute one-day change of +/-5.52% on its earnings reaction day. (For stocks that report before the open, its earnings reaction day is that trading day. For stocks that report after the close, its earnings reaction day is the next trading day.) So far this season, the average stock that has reported has seen an absolute one-day change of just +/-4.17%.
While earnings volatility has been lower than normal across all of the stocks that have reported this season, share-price reactions to earnings have also been much weaker than normal. Below are a number of charts showing how stocks have performed on their earnings reaction days this season versus the average over the last ten years based on a number of earnings scenarios.
As shown in the first chart below left, stocks that have beaten consensus analyst EPS estimates have risen by an average of just 0.06% on their earnings reaction day this season. Over the last ten years, the average EPS beat has gained 1.65% on its earnings reaction day. Reactions to top-line sales beats have actually been negative. As shown, stocks that have beaten sales estimates this season have averaged a one-day drop of 0.41% on their earnings reaction days versus an average gain of 1.36% for sales beats over the last ten years.
While EPS and sales beats are usually rewarded with positive share-price reactions, this season they’re not being rewarded at all, and in the case of sales, beats are actually being punished!
Interestingly, while beats have experienced much weaker than normal performance this season, misses are performing in line to better than they normally do. The average stock that has missed EPS estimates has declined 3.34% on its earnings reaction day this season, which is the exact same as the average reading for the last ten years. The average stock that has missed sales estimates has fallen 1.65% on its earnings reaction day this season, which is actually better than the 10-year average of -2.07%.
Stocks that beat both EPS and sales estimates have averaged a one-day gain of 2.36% on their earnings reaction days over the last ten years. This season, stocks that have beaten on both the top and bottom line have seen a minuscule one-day gain of just 0.15%. On the flip side, stocks that have missed both EPS and sales have averaged a one-day drop of 4.22% this season, which is slightly better than the average drop of 4.47% seen for EPS and sales misses over the last ten years.
Finally, below we look at price reactions based on forward guidance. Normally, a stock that raises guidance sees the biggest reward on earnings reaction days with a one-day average gain of 4.04% over the last ten years. This season, the average stock that has raised guidance has gained just 0.82% on its earnings reaction day. Stocks that lower guidance have historically gotten crushed with an average one-day drop of 5.3%. This season, the average stock that has lowered guidance has fallen even more with a one-day drop of 6.03%.
To conclude, investors have simply not been willing to reward companies that have posted strong results this earnings season. In a “normal” market environment where investors are focused more on fundamentals at the micro-level, we see buying in reaction to positive reports and selling in reaction to negative reports. This season, there seems to be much less of a focus on the micro and a much bigger focus on the macro, with the economy (and Corporate America) facing the key headwind of higher interest rates down the road. Of course, this type of environment also presents opportunities for investors to find stocks that may be getting unduly punished because others are looking to “sell first and ask questions later.” Bespoke publishes in-depth earnings analysis for subscribers on a daily basis throughout earnings season, including Conference Call Recaps as well as individual results and share price reactions. You can see these reports by starting a two-week trial to Bespoke Premium today.
