Cassidy is an author, a scientist, and an amateur investor interested in learning more about the stock market.
I recently watched one of my stocks (GNRC) jump 10% after its quarterly earnings were announced. I sold it and looked for others to buy. One I was interested in buying (AUDC) dropped 17% after earnings, so I scooped it up at what I thought was a discount before it fell even further over the next few days. I then saw another stock I was interested in (GSHD) was about to release earnings, so I decided to wait before purchasing it. That turned out to be a big mistake as I missed out on a 23% jump. This all got me thinking about whether it's better to buy before or after earnings are announced and whether this depends on if you think the company will beat or fall short of earnings estimates. I decided to do some research to find out.
I gathered data on the most recent 4 quarterly earnings reports for all 30 stocks in the Dow Jones Industrial Average (DJIA) index. Data for percent change after earnings were announced were obtained from Market Chameleon, and how much stocks beat or missed earnings estimates was obtained from Yahoo! Finance. Control data on DJIA daily changes was also obtained from Yahoo! Finance.
On average, do stocks go up or down after earnings are announced?
I first wanted to know how stock prices change on average after earnings are announced, and I found that the average change was -0.2% with a standard deviation of 4.1%. For comparison, the average daily change in the DJIA index for 30 random dates over the same time period was -0.1% with a standard deviation of 1.0%.
This means that there is essentially no change in stock prices on average after earnings are announced. Prices do appear to be more variable after earnings, though, based on the standard deviation, but it's important to note that index price changes will inherently be less variable than individual stocks.
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What about when you compare stock price changes to whether a stock beats or falls short of earnings estimates?
So the average price change after earnings may not be impressive, but maybe that's just because half the stocks are jumping after beating earnings estimates while the other half are falling after missing estimates. If you can guess whether a stock will beat earnings, then surely you can profit off of it, right? The data shows a different story.
As you can see above, there is no clear pattern to the data. About half the data is above the 0% line, and about half is below it. Similarly about half the data is to the left of the $0 line (earnings meeting the consensus estimates), and half is to the right. There is no clear trend upwards or downwards. This suggests that the change in stock price is not related to whether the company beat or fell short of earnings estimates. Since the graph looks a bit confusing with all the data points, I also made a histogram to look more closely for trends.
Based on the histogram, it does appear that stocks that fell short of earnings estimates did generally have a reduction in share price while those that beat earnings estimates did increase slightly. However, the averages are not very impressive, the standard deviations are enormous, and none of the results are statistically significant. This again suggests that there is no real correlation between share price changes and beating or missing earnings estimates.
So should you buy a stock before it announces earnings?
Based on the data from the stocks in the Dow Jones Industrial Average index over this past year (2019 to 2020), it makes no difference whether you buy a stock before or after earnings are announced. On average, a stock's share price does not increase or decrease more than on any other day, and share price changes are not correlated with beating or missing earnings estimates. Keep in mind that this is only true on average, which means having a diverse portfolio of stocks makes you less subject to risk. Some stocks will jump after earnings and some will fall, but on average these changes cancel each other out. This is why consistent investing on a monthly or yearly basis generally outperforms trying to time the market over the long term.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.