The Truth About Corporate Stock Earnings Estimates

November 17, 2023
Companies often beat their stock earnings estimates. What gives—and how are traders to respond?

Many traders use earnings estimates to assess a company's growth potential and therefore its stock's trajectory. So what are traders to make of the fact that an average of 78% of companies in the S&P 500® Index have beaten their estimates on a quarterly basis since 2020?

"Company executives—who provide the earnings guidance that analysts use to create their estimates—are loath to disappoint investors," says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. "Just as airlines can pad flight times to avoid being considered late, company executives can issue conservative earnings guidance so it's easier to meet or beat analysts' expectations."

Given that such underestimates are par for the course, are earnings forecasts actually useful when making trading decisions? "In isolation, not really," Randy says, "but looking at the data over time can be helpful." Specifically:

  • Stock performance: How does the stock tend to perform when the company surpasses its earnings estimates? "If it has a track record of rising after the company beats analysts' estimates, there's a good chance it will do so next time," Randy says. Conversely, a company that regularly beats its estimates but nevertheless experiences share-price declines may have underlying weakness. "In that case, you may want to dig into the company's earnings reports, which tell a more granular story than the top-level figures," Randy adds.
  • Estimates over time: Are estimates trending upward? "Generally, you're probably better off with companies that are increasingly optimistic about their prospects, even if current estimates aren't particularly rosy," Randy says. "A company with flat or declining earnings estimates is rarely a good buy."

To research a company's earnings history and expectations, log in to schwab.com, search for its ticker symbol or name, then scroll down to Expected Earnings.

To research a company's earnings history and expectations, log in to schwab.com, search for its ticker symbol or name, then scroll down to Expected Earnings.

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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk, including loss of principal.

Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance.

Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.

This information provided here is for general informational purposes only, and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner, or Investment Manager.

Schwab does not recommend the use of technical analysis as a sole means of investment research.

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The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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