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What is an Earnings Surprise?

What is an Earnings Surprise?

Earnings surprises occur when the reported quarterly or annual earnings of a company are different than they were projected to be. This could be a good surprise or a bad surprise.

The price of a stock will change quickly with this new information. Positive or negative earnings surprises occur when the earnings estimates for a company in a given quarter or year turn out to be better or worse than expected. Positive surprises will naturally cause the stock price to jump up, while negative surprises will cause the price to fall.

The market and investors individually would have been basing their valuation of the stock on numbers that turned out to be a bit off. New information such as this will disseminate rapidly and will be reflected in the stock’s price almost instantly, barring any volatility while the price finds its new range.

The earnings estimates that are used to predict earnings are the result of averaging the predictions dozens of analysts from respected firms in the industry, using all of the research and intelligence that is available, so it is understandable that investors might be surprised when these turn out to be wrong.

Insider trading and front-running are two types of illegal trading that might take place before such surprises are made known to the public.

Keywords: quarterly review, insider trading, market efficiency, positive and negative earnings surprise, front running,