When a company announces its quarterly financial results, the first headlines that cross often reveal whether the company beat or missed analysts’ expectations for earnings.
But does this really matter for investors are traders?
Not really, argues Peter Garnry, Saxo Bank’s Head of Equity Strategy.
“Contrary to the prevailing myth, also reinforced by the media, that earnings surprises are everything, our findings crush this myth,” writes Garnry who tested the first 103 earnings announcement of the current earnings season.
“There exists indeed a positive relationship meaning that a higher earnings surprise leads to higher excess return and vice versa. The problem is just that the R-squared is only 0.09. In other words, the earnings surprise only explains nine per cent of the variation in the excess return. So even if you were the best earnings forecaster in the world you would not be able to make consistent trading profits.”
R-squared is a statistical measure that shows how well a data point fits a line. At 0.09, the R-squared suggests almost no relationship between an earnings surprise and returns.
So what actually moves a stock after an earnings announcement?
“The missing piece is likely a mix of factors with the forward guidance and management statements likely explaining a lot of the variation in the excess return,” says Garnry.
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