Earnings Surprises And Share Price Impact

by: Constantin Gurdgiev

A very interesting summary graph from FactSet on the impact of earnings performance relative to consensus expectations on share prices:

In basic terms, upside to consensus is systemically rewarded, while downside impact decays over time. The chart reflects 5 years' worth of data, so capturing the period of declining earnings, where positive surprises should naturally be priced at a premium. The question the data above raises is whether coincident or subsequent share repurchases provide support to the upside for underperforming firms and/or for outperforming firms.

Remember, recent McKinsey research showed that deviations from consensus forecast do not matter that much when it comes to underwriting longer term returns: