Understand Stock Price Drivers: Earnings Surprises and What They Mean
Two major factors influence stock prices over time: earnings and interest rates. While investors can’t influence interest rates, they can monitor a company’s earnings every quarter.
The earnings figure is crucial, but whether it exceeds or falls short of expectations—often referred to as a beat or a miss—can greatly affect stock performance. Therefore, investors should pay close attention to earnings surprises, as a significant beat can lead to a rise in stock price, while a miss might do the opposite.
What is the Zacks Earnings ESP?
The Zacks Earnings ESP, or Expected Surprise Prediction, offers an edge in understanding recent analyst estimate revisions ahead of a company’s earnings report. This concept is based on the idea that updated projections reflect the most accurate and complete information available.
Essentially, the Expected Surprise Prediction compares the Most Accurate Estimate—the latest estimate available—with the overall Zacks Consensus Estimate. The resulting percentage difference is the ESP figure. This system also uses the Zacks Rank to identify stocks likely to beat their next quarterly earnings estimate, which could lead to a rise in stock price.
When a positive earnings ESP is combined with a Zacks Rank of #3 (Hold) or better, stocks historically show a 70% success rate in delivering a positive surprise on bottom-line results. According to a 10-year backtest, this strategy has yielded approximately 28% annual returns for investors.
Roughly 60% of stocks fall into the #3 (Hold) category, suggesting they will perform alongside the broader market. However, stocks rated #2 (Buy) and #1 (Strong Buy) are expected to outperform, with Strong Buy stocks usually leading in performance.
Spotlight on Hewlett Packard Enterprise
Now let’s examine a stock that meets the criteria for the ESP qualifications. Hewlett Packard Enterprise (HPE) currently holds a #3 (Hold) rating and is set to report its quarterly earnings on December 5, 2024. The Most Accurate Estimate sits at $0.56 per share.
Calculating the percentage difference between the $0.56 Most Accurate Estimate and the $0.55 Zacks Consensus Estimate, HPE has an Earnings ESP of +1.51%. Additionally, HPE is part of a larger pool of stocks showcasing positive ESPs. Investors should utilize the Earnings ESP Filter to identify the best stocks to trade before earnings announcements.
Another notable stock with a positive ESP is Meta Platforms (META). This stock carries a Zacks Rank of #2 (Buy) and is scheduled to report earnings on February 6, 2025. The Most Accurate Estimate for META is $6.75 per share, which translates to a +0.15% difference with the Zacks Consensus Estimate of $6.74.
Both HPE and META display positive ESP figures, indicating a strong likelihood of beating analyst forecasts in their upcoming earnings reports.
Discover Stocks with High Trade Potential
To benefit from potential earnings surprises, use the Zacks Earnings ESP Filter to find stocks with the highest chances of positive or negative surprises. This tool is designed to help you make informed trading decisions ahead of earnings season. Check it out here >>
Unlock Stock Opportunities Amid Infrastructure Spending
Significant federal funds are being allocated to repair and enhance America’s infrastructure. This investment will not only go toward roads and bridges but also into AI data centers, renewable energy projects, and more.
Explore 5 surprising stocks that are positioned to gain from this substantial spending phase that is just beginning.
Download the guide on How to Profit from the Trillion-Dollar Infrastructure Boom completely free today.
Want timely recommendations from Zacks Investment Research? Download the report titled 5 Stocks Set to Double at no cost.
Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report
Meta Platforms, Inc. (META): Free Stock Analysis Report
To view this article on Zacks.com, click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
