Module 10 · Lesson 2 of 12 · Fundamentals and macro · About 5 minutes
Earnings Reports and Guidance: Estimates, Surprises and Calls
On this page
Before you read: Reading Company Financial Statements: A Plain-Language Guide
What you will learn
- What happens in an earnings season, from the press release to the call.
- What consensus estimates, an earnings surprise and guidance are.
- Why a stock can fall on a beat and rise on a miss, and why implied volatility often drops after the report.
What is in an earnings release?
What does a company tell the market four times a year?
Most US companies that report to the SEC publish results every quarter. A typical sequence is:
- Date announcement. The company sets the report date, often weeks ahead. Many report before the open or after the close.
- Press release. Headline figures: revenue, earnings per share, often adjusted measures, and sometimes guidance for coming periods.
- Conference call. Executives discuss results and answer analysts’ questions. A recording or transcript is usually posted on the company’s investor relations site.
- Filing. For the first three fiscal quarters, the full quarterly report on Form 10-Q follows, with more detail and notes. After the fourth quarter, the annual report on Form 10-K covers the full year.
Many releases show both figures under generally accepted accounting principles (GAAP) and adjusted, or non-GAAP, figures that exclude items the company considers unusual. Companies must reconcile the two, and the excluded items deserve a careful look.
Earnings timeline diagram
Illustrative diagram constructed for teaching. Not real market data.
The diagram shows a fictional earnings timeline from the date announcement through the release, the call and the quarterly filing (a 10-Q for the first three quarters, the annual 10-K after the fourth), with a line showing implied volatility rising into the release and dropping after it. It is constructed for teaching and is not real market data.
What are estimates and surprises?
If a company earns $1.00 a share, is that good or bad news?
Analysts publish estimates for revenue and EPS. Data providers average them into a consensus estimate. An earnings surprise is the difference between reported results and the consensus:
- Reported EPS $1.10 against a consensus of $1.00 is a 10% beat.
- Reported EPS $0.95 against the same consensus is a 5% miss.
Different providers can show different consensus figures, depending on which analysts they include and whether they use GAAP or adjusted numbers.
Why can a stock fall on a beat?
If the results were better than expected, what else could the market have been expecting?
The headline surprise is only part of the information. A stock can move against the headline because of:
- Guidance. A company’s own outlook for future revenue or earnings may be lower than analysts expected, even after a strong quarter.
- Details. Margins, a key product line, customer numbers or cash flow may tell a different story from EPS.
- Positioning. If many investors already expected a strong report, the price may already reflect it.
- The call. Comments on demand, costs or risks can change the picture after the release.
The price reaction is a combination of all of these, and of everything else happening in the market that day.
What happens to options around earnings?
Why might option prices be expensive just before a report and cheaper just after?
Before a report, implied volatility on short-dated options usually rises, because traders expect a larger move. After the report, the uncertainty is resolved and implied volatility often falls sharply, which is sometimes called a volatility crush. The expected move lesson shows how option prices are turned into a rough expected move, which is an estimate of size, not of direction.
What this does not tell you about earnings
- How any stock will react to any report.
- Whether consensus estimates are accurate. They are opinions, and they change.
- How to trade around earnings. Price gaps after reports can be large, and stop orders can fill far from their prices.
- Nothing here recommends any trade or stock.
Method in Practice: an event-risk plan
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. Earnings reports can move a stock far, often outside regular hours (this lesson). John's stock plan has one event rule: no position held into a report, and no new trade until 30 minutes after the next open.
John's plan (Pinecrest Tools)
- Before a report
- flat by the close
- After a report
- wait 30 minutes after the open. Then the normal plan, at the normal size
- Risk
- $150 maximum, costs included
Three outcomes
-
Flat before the report: sold 100 shares at $52.85 before the close → +$83. The stock opened $6 lower the next day
-
After the wait: a normal setup at 09:00, then the stock kept falling → −$112
-
No trade: report day itself → $0
Show the full replays
| Replay | What happened | Result after costs |
|---|---|---|
| A | Held 100 shares from $52.00. Report after the close. Sold at $52.85 at 14:50 (limit) | +$85 − $2 = +$83. The next open was $6 lower: −$600 avoided |
| B | Waited until 09:00 the next day. Bought 100 at $52.00 on a bounce. Stop filled at $50.90 | −$110 − $2 = −$112 |
| C | Report day | $0 |
Test it yourself
- Mark every report date in your test period before replaying.
- Compare the plan with and without the flat-before-reports rule.
- Count how often a post-report trade worked, and how often it failed.
Where it breaks
- Report dates can change, so check the company's own announcements.
- The days after a report can stay volatile.
- Being flat also means missing the moves that went your way.
Reflection question: Does your plan say what you do with an open position before a scheduled report?
Check yourself
- Consensus EPS is $2.00 and reported EPS is $2.20. What is the surprise as a percentage? Hint: (2.20 − 2.00) ÷ 2.00.
- Name two reasons a stock might fall after beating estimates. Hint: the outlook, and what was expected.
- Why does implied volatility on short-dated options often drop after a report? Hint: what uncertainty has just been resolved?
Reflect on your own process
- Does your written plan say anything about holding positions through scheduled earnings reports, and why did you choose that rule?
- When you note an earnings result in your journal, do you record whether it was GAAP or adjusted, and which consensus source you used?
- How would you check that a headline 'beat' matches the company's own release and reconciliation?
- Does your plan say what you do with an open position before a scheduled report?