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In the latest confirmation of the market's euphoric mood, as we near the end of earnings season with almost 80% of the companies in the S&P 500 having reported Q4 earnings, one distinct trend emerges: while stocks that have beaten on earnings have gotten an unusually large reward, those that have missed have unusually small punishment.
As FactSet reports, companies in the S&P 500 that have reported negative earnings surprises for Q4 have seen a decrease in price of 0.4% on average from two days before the company reported actual results through two days after the company reported actual results. Over the past five years, companies in the S&P 500 that have reported negative earnings surprises have witnessed a 2.6% decrease in price on average during this four-day window.
Percentage - Persist - End - Quarter - Price
Should this percentage persist until the end of the quarter, it will mark the smallest average price decline over this four-day window for S&P 500 companies reporting negative EPS surprises in nine years, or since Q2 2009.
Meanwhile, on the other end, stocks that have beaten on earnings have posted unusually strong performance relative to the market three days after reporting, as the following chart shows. According to Morgan Stanley, an earnings beat or miss is defined as a result that comes in 5% higher or lower than the last consensus estimate. In 4Q18, the median stock that has beaten has been...
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