It's well known that companies underpromise and overdeliver on earnings. They set the bar low and analysts follow along with their estimates and a modest earnings outperformance is almost always the result once earnings are reported. Just look at the average earnings surprise for the S&P 500 Index each quarter from 2015 through 2019 [see chart in link below]. "Surprises" averaged 5.3% over those 20 quarters. Surprises were always pleasant and positive. In truth, the market wasn't really surprised during those quarters. It expected modest outperformance over the consensus. Everyone knows how it works. But starting in the second quarter of 2020, the earnings outperformance actually did surprise the market. For the last three quarters of 2020 and for all 4 quarters of 2021, earnings surprises averaged 16.1%. It's a significant reason we saw such big stock market gains in the last three quarters of 2020 (the S&P 500 Index was up 47% for those final 9 months) and 2021 (29% for the year). We can see, however, that the first 3 three quarters of this year are back to being more normal "surprises." Our expectation going forward is that we are back to normal when it comes to outsized earnings beats. The market won’t reward average surprises with high returns.

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