Earnings Surprise Indicator (Post-Earnings Announcement Drift)

22 oct

What It Does:
- Displays a company's actual earnings vs. analysts' estimates over time
- Shows "earnings surprises" - when actual results beat or miss expectations
- Helps identify trends in a company's financial performance

How It Works:
- Green bars: Positive surprise (earnings beat estimates)
- Red bars: Negative surprise (earnings missed estimates)
- Yellow line: Analysts' earnings estimates

Correlation with Post Earnings Announcement Drift (PEAD): PEAD is the tendency for a stock's price to drift in the direction of an earnings surprise for several weeks or months after the announcement.

Why It Matters:
- Positive surprises often lead to upward price drift
- Negative surprises often lead to downward price drift
- This drift can create trading opportunities

How to Use It:

1. Spot Trends:
- Consistent beats may indicate strong company performance
- Consistent misses may signal underlying issues

2. Gauge Market Expectations:
- Large surprises may lead to significant price movements

3. Timing Decisions:
- Consider long positions after positive surprises
- Consider short positions or exits after negative surprises

4. Risk Management:
- Be cautious of reversal if the drift seems excessive
- Use in conjunction with other technical and fundamental analysis

Key Takeaways:
- Earnings surprises can be fundamental-leading indicators of future stock performance, especially when correlated with analyst projections
- PEAD suggests that markets often underreact to earnings news initially
- This indicator helps visualize the magnitude and direction of surprises
- It can be a valuable tool for timing entry and exit points in trades