Skip to content

Earnings Misses – What You Need To Know

justin freeman
Justin Freeman trader
Updated 11 Jun 2024

Earnings misses are when a company or a stock fails to reach the consensus expectations of markets and analysts. Consensus expectation is the average, and a beat or a miss is data falling either side of that number.

Market sentiment shifts through the course of earnings releases with increased buying pressure from risk-on investors signalling the market could be about to turn. Marking the dates to watch on an earnings calendar can help you keep track of who is reporting and when, and getting your strategy ready for those potential beats or misses.

What Is An Earnings Estimate?

An earnings estimate is a projection made by industry analysts of what a firm’s earnings per share (EPS) and total earnings might be. Top-rated analysts who work for investment banks, institutional investment funds or third-party research firms then see their views combined by agencies to give a consensus reading.

Coming up with an estimate of earnings can be a game of cat and mouse. Guidance is offered by the management of the firms about to release numbers in an effort to manage analyst expectations. The market doesn’t like surprises and as analysts don’t want to look too far off the mark, they’re keen to come in line. That can result in earnings estimates being downplayed, and on average more than 70% of firms ‘beat’ expectations. This makes those that do ‘flunk’ stand out to an even greater extent.

This quarter has produced a range of earnings misses, which will impact the returns of existing shareholders, but for those approaching the situation for the first time, Q2 misses can be a trading opportunity. It’s a question of whether the bad news is already priced in, and if this is a chance to buy shares in a firm that is about to turn a corner. If you need to know more about what data to look for, see our earnings guide.

Statistics On Earnings Season Misses

One of the quirks of the earnings season is that the number of firms in the S&P 500 stock index, which beat EPS forecasts is on a five-year average above 75%. There are also interesting data points relating to the extent that firms beat or miss expectations. During Q1 of 2022, US companies reporting earnings and beating estimates did so on average by 4.9%, which is some way below the five-year average overshoot of 8.9%.

The influence that beats or misses have on stock prices can also be impacted by the nature of the existing shareholder base. Stocks such as Apple Inc are very popular with retail investors and passive fund managers. Those two groups own 41% and 20% of Apple stock, respectively. These buy-and-hold shareholders tend to be running long-term strategies and are therefore less likely to be influenced by one quarter of surprisingly good or bad earnings. This could partly explain why Alphabet (Google) share price rebounded on what, at face value, looked like bad news. Approximately 34% of Apple stock is owned by institutional investors and founders Larry Page and Sergey Brin between them own almost 6% of the company. They are unlikely to be shaken out of their positions by one round of bad news.

Active fund managers and speculative traders tend to focus on stocks that are at the more volatile end of the price-volatility spectrum. This group includes meme stocks and firms such as Snap, which did see its share price tank after its earnings announcement.

Historical data relating to share price moves of firms in the S&P 500 index shows that the stocks with the stickiest ownership tend to go up in value by only 0.5% when they beat earnings, whereas the average for the S&P index is 0.7%. The reaction is also muted when earnings miss, with the average price fall for sticky stocks being 1.4% but the average for the index as a whole being 2.3%.

Investors looking to buy stocks that can ride out earnings news, whether it is good or bad, might want to consider other names with high levels of passive and retail ownership. These include Johnson & Johnson (passive 24%, retail 30%), Amazon (passive 17%, retail 40%), Ford (passive 22%, retail 47%), and Exxon Mobil (passive 24%, retail 43%).

How Do Stocks React To Earnings Misses?

For the second consecutive quarter, Morgan Stanley dipped and then rallied after posting an earnings miss. This partly counterintuitive move reflects that share prices of firms that post disappointing results can be buoyed by a general air of euphoria sweeping across the markets. When more than 70% of the data pool are posting wins, dormant investors can be stirred into buying back into the market.

The profile of a stock’s shareholder base can also influence the extent that share prices react to earnings news. Stocks such as Apple Inc (AAPL), which have a large percentage of their total float owned by passive funds and retail investors, tend to experience lower price volatility if earnings miss.

Passive funds own 20% of Apple and retail investors 41%. These shareholders tend to take a buy-and-hold approach and are less likely to be influenced by one quarter of surprisingly good or bad results. In comparison, stocks held by more active fund managers and day traders tend to fall or rise by a greater extent.

Historical data points to the S&P 500 stocks with the ‘stickiest’ investors rising by only 0.5% on earnings beats, whereas the average for the index is 0.7%. When earnings miss, the downside move is also more measured, with the average price fall for the index being 2.3%, but sticky stocks only falling by 1.4%.

If you’re wondering why good or bad earnings news doesn’t necessarily correspond to dramatic price moves, then consider whether the firms you’re following have a large percentage of sticky investors. Some that top this particular chart include Johnson & Johnson (passive 24%, retail 30%), Amazon (passive 17%, retail 40%), Ford (passive 22%, retail 47%), and ExxonMobil (passive 24%, retail 43%).

Final Thoughts

A positive earnings season can be a trigger for market rallies, but there are always losers as well as winners. The demanding macro situation adds another layer of complexity and means that speculative buys of underperforming firms may take some time to come good.

A dip in price by a firm that posts a miss can be a buying opportunity, but some caution is needed. A clear indication that the company’s management team has identified how to improve performance could be a catalyst for a share price rebound, but firms dealing with systemic issues are best avoided.

Whether you are an experienced investor or are new to trading, the recalibration process associated with earnings season can make it a good time to step into the market. There is additional ‘churn’ in the markets and this can result in new buying opportunities.

Earnings season misses can act as a catalyst for institutional investors to pull the trigger on trades they have been contemplating for some time. The additional information the reports give doesn’t necessarily have to be positive, just being able to take an up-to-date snapshot of the situation can be sufficient for big players to put their capital into play. Smaller retail investors who spot that strong buying support and trade with it, are putting themselves in line with the decision makers who ultimately drive stock prices.

Bad news in the form of an earnings miss can also result in short-term price weakness and offer more resilient investors an opportunity to get into positions at a lower level. This approach is best suited when firms also have a plausible ‘turnaround’ story working in the background.

Whether you are an experienced investor or completely new to trading, earnings season is a time to spot new trends as they emerge. Trading with the trend is the secret to successful investing, but another is the need to use a trusted broker. The names on this shortlist of good brokers offer news, research, and analysis, to help you make the most of the opportunities earnings season offers.

justin freeman
Justin is an active trader with more than 20-years of industry experience. He has worked at big banks and hedge funds including Citigroup, D. E. Shaw and Millennium Capital Management.