Earnings season brings headlines, hot takes, and a flood of numbers. You’d think every surprise beat or miss would spark an immediate and lasting stock move. But markets rarely work that neatly.
Instead, what you often see is this: a quick jump (or drop) on announcement day, followed by a slow, predictable drift in the same direction over days, weeks, or even months. This isn’t new — researchers have been documenting the phenomenon since the 1960s.
As of August 1, 2025, two-thirds of S&P 500 companies had reported Q2 earnings. The numbers looked good: 82% beat EPS estimates, 80% topped revenue forecasts, and EPS grew about 6.4% year-over-year. Yet stocks barely moved, with announcement-day gains averaging just 1.9%. The lesson? Markets digest in stages.
The Expectation Game
It’s not raw results that move prices — it’s performance versus expectations.
- Consensus vs. Whisper: Beating Wall Street consensus looks good on paper, but the market often sets its own “whisper” expectations, usually higher. A company can top consensus and still disappoint if it misses the whisper.
- Example: Two companies beat consensus by 10%. One clears the whisper, the other doesn’t. Guess which stock pops? Data shows the one that beats both tends to jump 2%+ intraday.
Add to this the games companies play — like shifting R&D expenses to engineer beats — and it’s clear why expectations matter more than absolute numbers.
The Three Phases of Price Moves
Phase 1: Before Results
Prices often drift ahead of earnings. Stocks with upcoming positive surprises tend to climb, while those bracing for misses slip early. Studies show this is more pronounced in institutional-heavy names than in retail-heavy stocks, where sentiment muddies the water.
Phase 2: Earnings Day(s)
Here’s where reality hits expectations. According to FactSet:
- Positive surprises → stocks rise an average of 2.4% in the four-day window (two days before, two days after).
- Negative surprises → sharper drops of about 3.5%.
Tone matters too. A confident outlook can amplify upside moves, while cautious commentary can blunt them, even on strong numbers.
Phase 3: Post-Earnings Announcement Drift (PEAD)
This is the long tail of earnings surprises. First spotted by Ball & Brown (1968), PEAD shows stocks keep drifting in the direction of the surprise for weeks or months. Early research showed annualized returns near 30%; more recent studies estimate 7.6%–12.5%.
PEAD tends to be strongest in small- and mid-cap names with less analyst coverage, where price discovery happens more slowly.
Surprise Is a Signal, Not Noise
The real takeaway? Earnings reactions aren’t one-and-done.
- Phase 1: Whispers and sentiment set the stage.
- Phase 2: Numbers and tone deliver the twist.
- Phase 3: The market digests, debates, and reprices — gradually.
Institutional investors usually move first; retail investors, who still account for about 20% of U.S. trading volume, come in later, often fueling the drift.
So the next time you see a company “crush estimates” but the stock barely budge, don’t assume the surprise didn’t matter. The market may just be starting its slow burn.
