Earnings Surprise
An earnings surprise occurs when a company's reported earnings differ from analysts' consensus estimate, either above (beat) or below (miss).
Before each earnings report, analysts who follow a company publish estimates for its revenue and earnings per share. The average of these forecasts is called the consensus estimate. When the actual result comes in above the consensus, it is a positive surprise, or a beat. When it comes in below, it is a negative surprise, or a miss.
The surprise is often expressed as a percentage: actual EPS minus estimated EPS, divided by the absolute value of the estimated EPS.
Example: analysts expect EPS of $1.00 and the company reports $1.10. That is a positive surprise of 10%.
Stock prices often react to surprises, but not always in the expected direction. A company can beat estimates and still fall if revenue disappoints, if guidance is weak, or if investors had expected an even bigger beat. Many companies manage expectations so that small beats are common, which means a simple beat is not necessarily a strong signal.
Research has documented a tendency for stock prices to keep drifting in the direction of an earnings surprise for some time afterward, known as post-earnings announcement drift.