What is an Earnings Surprise?
How Does an Earnings Surprise Work?
A positive earnings surprise generally means that a company did better than expected over the last quarter. Many times, a positive earning surprise is followed by a jump in the company's share price as soon as the market opens following the announcement. However, this is not always the case as investors look at many other items in quarterly results, such as revenues, margins, and future earnings guidance. If one of these metrics comes in below expectations, if could cause a drop in the firm's stock. Likewise, an earnings short-fall can cause a sharp drop in a company's stock. In either case, earnings surprises introduce volatility to the market.
Why Does an Earnings Surprise Matter?
In less ethical situations, analysts may be pressured by their employers to send a certain message about a stock, or quite often the company provides information that will lead analysts to publish earnings estimates that the company will easily beat (known as sandbagging).
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