Learn the stock market › Read an earnings report › Lesson 5 of 7
Why do stocks fall on good earnings?
How often a stock falls after beating the estimate
Each report is compared with the analysts' average estimate of earnings per share before it. The table counts 478 reports from the 20 largest US companies since 2020, the ones that beat the average, and how the stock moved on the day the market could first trade on the report.
| Beat the estimate by | Reports | Fell that day | Median move |
|---|---|---|---|
| 0–5% | 126 | 54% | −0.3% |
| 5–10% | 104 | 44% | +0.9% |
| More than 10% | 147 | 43% | +0.8% |
| All | 377 | 47% | +0.5% |
Across all the reports that beat, the median move was +0.5%, close to nothing. Among the reports that missed, the stock fell 71% of the time, see the next lesson.
Why the price is compared with expectations is explained in the lesson on earnings day. Here are five reasons why beating the average can still send a stock down.
Five reasons
The average is not what the market expected. The published average is not always up to date, and many buyers had already counted on a better number. If the stock rose into the report, earnings just above the average can be less than what the price already held.
Earnings are only one line. If revenue or bookings are weaker than expected, they can matter more than earnings, because they say more about the coming quarters.
The future matters more than the quarter. A cautious word about next quarter can send the stock down on the same day a strong quarter is reported. That is lesson 6.
The quality of the earnings. Earnings lifted by a one-time item, a lower tax rate or a currency gain rarely count as much as earnings from the business itself. That shows in the income statement.
The analysts' number is often adjusted. The estimate usually refers to an adjusted earnings per share that leaves out certain items. It can differ from the earnings per share in the income statement.
An example
On Apr 19, 2022, Netflix's earnings beat the analysts' average by 21%, and the stock fell 35% that day. What sent it down is not in the earnings per share. You have to look for it in the rest of the report.
How this is counted
The estimate is the analysts' average for earnings per share as it stood before the report. The move runs from the close before the report to the close of the first day the market could trade on it, so a report released after the close counts on the next day. The move also includes whatever the whole market did that day. How much each company usually moves on earnings day is in the earnings day study.
Test yourself
A company beats the earnings estimate by 10%, but management lowers its outlook for next quarter. What is most likely?