A couple of weeks ago we published our first free post on the upcoming earnings season when we updated our popular “Most Volatile Stocks on Earnings” list. In today’s post we take a look at the impact that quarterly earnings reports have on stock prices.
Our Interactive Earnings Report Database is an extremely useful tool that Bespoke Institutional members have access to. The database sits right in the member section of our website and allows users to pull up the historical earnings report information for pretty much every publicly traded company in the U.S. One of the things that makes our database unique is that it includes stock price information — meaning you can see how stocks have historically reacted on their earnings report days. This is extremely useful for investors that have to make investment decisions before, on, or immediately after a company reports earnings.
Our database has quarterly earnings information for individual stocks going back to 2001 — over 110,000 individual earnings reports in fact. All of this data has value for tracking broad earnings trends over time as well. Here’s a stat for you — since 2001, the average stock that reports earnings has averaged a one-day change of +/-5.49% on its earnings reaction day. (Remember, for companies that report before the open, its earnings reaction day is that trading day. For companies that report after the close, its earnings reaction day is the next trading day.)
We wanted to see if earnings reports were having a bigger or smaller impact on stock prices recently, so using our database, we pulled the average absolute % change on earnings reaction days for all 110,000+ earnings reports that we have. (For example, if NFLX gains 10% on one earnings reaction day and loses 20% on another earnings reaction day, its average move on earnings is +/-15%.) We then calculated the average earnings-reaction-day change for all stocks that have reported over the last year, and then rolled it back all the way to 2002. The first chart highlights this data.
The orange line in the chart represents the historical average change of +/-5.49% mentioned above. For all stocks that have reported earnings since 2001, they have averaged a move of +/-5.49% on their earnings reaction days. The blue line shows the one-year rolling average earnings reaction day change. As you can see, during the Financial Crisis, volatility on earnings spiked significantly, rising up to more than 8% at the peak! In recent years, though, stock price volatility on earnings has been much more subdued, although we’ve seen a small tick higher over the last couple of months.
The chart below shows the rolling one-year average daily change on earnings reaction days, but it also includes the average daily % change that the S&P 500 has experienced on a rolling one-year basis. This really shows how earnings reaction day volatility moves inline with broad market volatility. You can see the spike in the S&P 500’s daily volatility during the Financial Crisis as well.
Bottom line — during earnings season, you can expect the average stock that reports to move somewhere between 5-6% in either direction in response to its report. This reading rises and falls depending on how volatile the market is in general at the time. Given the recent pick-up we’ve seen in market volatility, we would expect stocks to see bigger moves than normal on their earnings reaction days this earnings season.