In our view, how a stock reacts to its earnings report is the ultimate arbiter of how good or bad the report actually was.  To get a read on the overall market, we keep track of the median one-day price change for all stocks that have reported earnings on a rolling three-month basis.  Over the last three months, the median one-day price reaction to earnings has been nearly flat at -0.03%, so we’d say earnings have been “market neutral” over the last quarter.

Below is a chart showing the rolling 3-month trend for earnings reactions over the last five years.  As you can see, the trend swings from positive to negative and back to positive quite a bit, so we’d categorize this as a mean reverting indicator.  Earlier this year in Q1 when the market was bouncing back from a horrific Q4 2018, stocks were trading extremely positive in reaction to earnings.  In fact, we saw the highest reading over the last five years towards the end of Q1 when stocks were experiencing a median one-day price change of roughly 0.75% in reaction to their earnings reports.  Since that peak, however, we’ve seen price reactions to earnings drift lower.  At the end of June, the reading had dipped negative, meaning companies were experiencing declines more often than gains in reaction to earnings, but over the last few weeks, we’ve started to see price reactions improve.

Now that we’re entering the thick of the Q2 reporting period, a continued move higher for stocks reporting earnings would go a long way in causing an overall market breakokut.  Stay on top of the most recent earnings trends by starting a two-week free trial to Bespoke Institutional.

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