John Murray
Worth remembering that a beat is only a grade against what analysts expected. Before you react to a headline, read what the company said about the months ahead, and never size a position on the headline alone.
What does it mean when a company "beats" earnings?
Discussion
Before a company reports its quarterly results, Wall Street analysts publish forecasts for its earnings per share, or EPS, which is profit divided by the number of shares. The average of those forecasts is the consensus estimate. If the real number comes in above it, that's a beat. Below it is a miss, and right on it is called "in line."
Earnings season is in full swing, with Netflix, Tesla and Meta all set to report this week. So far it's been mostly beats: FactSet says 84% of the S&P 500 companies that reported through Oct 16 topped their EPS estimates, above the 5-year average of 78%. But a beat doesn't mean the stock goes up. Prices react to how results compare with what traders already expected, plus what the company says about the months ahead. Last quarter, Netflix shares sank more than 7% after results that simply matched estimates.
So when you see "beat" or "miss" in a headline, it's a grade against a forecast, not a verdict on whether a business is good. Got a question about earnings? Ask below, since there are no silly questions here.
The numbers come from FactSet's Oct 16 Earnings Insight and CNBC's Oct 18 earnings preview.