Earnings Announcements Sliced and Diced

As we get into the thick of the Q4 earnings season, we thought this might be a good time to look at the different elements of an earnings announcement and how they impact stock returns and volumes. 

Earnings are one of the major times each quarter when new information is released to investors that can significantly impact stock prices. In addition to the earnings announcement, the quarterly reports filed with the U.S. Securities and Exchange Commission afterward include a lot of new information about a company’s balance sheet, cashflows and many other operations. 

Earnings and prices move together over the long run 

Earnings are important to stock prices. Over the long run, earnings (chart below, green line) and stock prices (blue line) move together. 

At times, there can be dislocations, which are often explained by interest rates (grey area). For example, in the 70s and into the 80s, earnings were elevated compared to stock prices, but that also coincided with high and rising interest rates as then-Fed Chair Paul Volcker hiked rates to tame inflation. This shows that rising rates not only mean bond prices need to fall (so their future returns increase) but also stocks. 

We also see that markets tend to look past recessions (grey bars), which cause earnings to fall temporarily. 

Most importantly, over time, these dislocations are resolved. 

Chart 1: Earnings matter a lot to prices 

In short, earnings are one of the most important drivers of stock returns over the long term. That makes them important to investors. 

Today, we’re going to look at some of the microstructure impacts of earnings season – from what day and time companies choose to report to how the market treats earnings beats and misses. 

Most earnings announced mid-week, split between pre-open and post-close 

Is the time a company reports earnings – the day or time of day – important? 

Many factors go into the timing of reporting earnings, from executive travel schedules to when competitors are announcing and regulatory requirements. 

Looking at S&P 500 companies’ earnings between Q3 2022 and Q3 2023, we see that Thursday is the most popular day, and over 85% of firms opt to announce in the middle of the week (chart below). 

What is the aversion to Mondays and Fridays?  

Some suggest announcing on Friday might signal you’re trying to hide something and want your results forgotten heading into the weekend. Still, others suggest avoiding Friday because good earnings might get overlooked. Similarly, some argue Monday earnings could be overlooked as people ramp up into the work week.  

However, there is one company that announces earnings on Saturday – Berkshire Hathaway. That’s because Warren Buffett believes that gives investors time to fully digest the report before markets open on Monday. 

The time to announce seems less controversial. Hardly any companies announce during market hours, but there’s a nearly even split between pre-open (orange bars, 56%) and after markets close (blue bars, 44%). But, as we’ll show later, maybe this shouldn’t be so even! 

Chart 2: Most S&P 500 companies report earnings on Tuesday, Wednesday and Thursday 

Another dimension is which week to announce within earnings season. Most announcements happen in the third and fourth weeks. However, some research suggests this might be a mistake. That’s because companies reporting early in earnings season get additional media attention, a boost to volumes and, more importantly, a 50bps higher earnings announcement premium! 

Wednesday has the best price premium, but not by much 

With all this planning around which day to announce, does it really impact returns (chart below)?  

It turns out… not so much. 

On average, Wednesday sees the best returns after earnings. But pretty much every other day performs roughly the same. 

Ultimately, though, the return premium for Wednesday over the other days averages just half a percentage point over the 25 trading sessions post-earnings. So, there’s no clear price penalty to reporting on any particular day. 

Chart 3: Companies reporting on Monday and Friday don’t see price penalty 

After-hours announcements see some return premium, reduced volatility 

The results are a bit starker for release time, though. 

After-hours announcements (chart below, blue line) consistently see better returns compared to pre-open announcements (orange line). 

After-hours announcements enjoy a roughly half-percentage point premium over pre-open announcements over the 25 trading sessions post-earnings. 

Chart 4: Pre-open earnings releases have seen worse results lately 

In addition, other research shows that pre-open earnings see increased price volatility for five days after the announcement. This increased volatility may play a role in the weaker returns for pre-open earnings. 

Maybe Warren Buffett is onto something! The authors of that study also suggest that pre-open earnings results are related to the lack of time investors have to parse announcements compared to after-hours announcements. 

Price penalty for missed earnings bigger than benefit for beating 

Of course, as much as we can debate the best day or time to announce earnings, nothing matters more than whether a company beats or misses earnings expectations. 

Other research suggests U.S. companies consistently manage down earnings expectations, only to see most companies beat.  

In fact, the five-year average beat rate for the S&P 500 is 77%, making a beat less “special.” That, in turn, might be why the penalty for missing is bigger than the benefit for beating (Chart 5). In the trading session after earnings, companies that miss are down over 2.5 percentage points on average (chart below, red line), while companies that beat are up just three-quarters of a percentage point (green line). That’s a 3.4-percentage point gap! 

Chart 5: Penalty is bigger for missing than bonus is for beating 

Interestingly, though, the day-one reaction to earnings is typically too negative. Even stocks that missed estimates start to see their price rebound by the second trading session post-earnings – while stocks that beat extend their gains. 

Earnings boost volumes pre- and post-announcement 

We typically see a dramatic increase in trading for stocks around earnings. In the session before, volumes are almost 50% above normal. In the session after earnings, volumes jump to well over double normal, and the trading stays elevated for around a week. 

We also see volumes increase more after an earnings miss (chart below, red bars). That’s consistent with the fact that earnings misses cause larger (negative) returns than a beat, too. 

Chart 6: Misses see bigger jump in relative volumes than beats 

Importantly, this all makes sense.   

Earnings are new news that helps investors value stocks, and it is a time for investors to decide to add or reduce holdings. In an “efficient” market, it’s a time for price discovery to happen and for valuations to be updated for adjusted earnings expectations. So, we see elevated trading and returns that are, on average, directionally related to the news. 

Filing the 10K or Q doesn’t matter nearly as much as earnings releases 

Typically, the accounting statements that go with an earnings announcement are filed later, up to a few weeks, though they can be the same day. The data above suggests the earnings release is much more important than the filing date – for returns and volumes. 

Nothing matters more than whether a company beats or misses 

Based on this data, we see that earnings are important. Although we see some different conventions or practices, like the timing of the earnings release, seem to matter much less. 

But, in the end, nothing matters more than whether a company’s earnings beat or miss. No matter the day or time. 

Michael Normyle, U.S. Economist at Nasdaq, contributed to this article.