By Jack Hough

It's too late for an earnings season preview, and way too early for a review, so consider this a prereview: The numbers look good. Maybe even surprisingly good -- and that's not a word I throw around willy-nilly.

The classic definition of an upside earnings surprise is when a company beats Wall Street's consensus estimate. But in recent years that has happened around three-quarters of the time. Most of these "surprises" reflect companies and analysts carefully managing investor expectations to beatable levels, not business results wowing.

That's reflected in stock reactions. Over the past five years, in cases where companies beat both earnings and sales estimates, their shares rose in response by an average of less than 1%. And it's unlikely that investors are underreacting. There used to be a trading phenomenon referred to as post-earnings-announcement drift, or PEAD, first documented in the 1960s. After upside earnings surprises, stocks would tend to continue beating the market for many months. But PEAD has vanished as upside surprises have turned ordinary.

Just over a decade ago, a study found that the combination of earnings surprises and immediate price jumps was a solid predictor of handsome returns over the following months. Ordinary investors would find it difficult to turn that into a buying strategy, and algorithmic traders might have already exploited it into oblivion. But I take the finding to mean that a surprise is only a surprise if it comes with a big price move. Recently, many companies have delivered just that.

In cases where companies have beaten both earnings and sales estimates, their shares have gained an average of 3.6% in response -- more than usual. Misses are getting punished more than normal, too.

Overall growth is solid. The blended fourth-quarter growth estimate for the S&P 500 -- actual results plus remaining estimates -- has been nudging higher, thanks to widespread and large upside surprises, and is approaching 13%. With the index trading at 25 times earnings, peppy growth seems like a box that needs to be checked right now, and so far, companies are checking it.

Let's run through a handful of recent earnings thrills and spills. GE Aerospace on Thursday gained 7% after reporting a 16% rise in revenue, excluding results from a legacy insurance business that the company is running off. Orders jumped 46% and earnings per share more than doubled. GE has more demand for its LEAP engines than it can handle, and there has been progress on deliveries, with J.P. Morgan predicting a 19% rise there in 2025.

Amphenol makes connectors, sensors, cables, antennas, and other doodads. On Wednesday, shares rose 7% when the company reported 30% fourth-quarter revenue growth in U.S. dollars, or 20% not counting acquisitions, driven by strong demand from data centers, commercial aviation, and industrial customers. Truist Securities analyst William Stein wrote that he needed to "get out the magnifying glass" to find weak points; they were largely in Europe.

Netflix was the talk of Wall Street on Tuesday, reporting record fourth-quarter subscriber growth, sending its shares up 10% the next day. Growth initiatives include advertising, cloud gaming, and live events. The company's advantages over legacy media look likely to grow from here. At a time when rivals are cutting costs, Netflix plans to increase content spending in 2025 by $1 billion, to $18 billion, and still turn out about $8 billion in free cash flow, up from $6.9 billion.

Evercore ISI calls the recent mix of earnings beating estimates "surprisingly broad." Big banks mostly thrived during the fourth quarter on higher interest rates and rising fees on investment deals. Blowout results for Delta Air Lines came from both leisure and corporate travelers, with momentum picking up throughout the fourth quarter; November and December had four of the top 10 revenue days in company history.

Carnival has an odd fiscal year that runs through November, so it reported results in late December, but they were strong enough to warrant calling out here. Adjusted net income came in at triple management's guidance, for example. For 2025, Carnival predicts 20% earnings growth, and says that two-thirds of business is already booked. The company will soon open a private Caribbean island -- something that has paid off richly in recent years for rival Royal Caribbean.

There have been some earnings flops. Wild swings in consumer demand around the Covid-19 pandemic left the freight industry in a long slump. On Jan. 16, trucker J.B. Hunt Transport Services missed earnings estimates and gave rare guidance that was well short of expectations. Shares fell 7%. Susquehanna Financial analyst Bascome Majors, who is bullish on the stock, wrote that the outlook "could come close to clearing the decks after a facing off versus optimistic 'the recovery's just around the corner' forecasts."

On Jan. 10, brewer Constellation Brands reported an earnings shortfall that sent its shares 17% lower. The company, which distributes Corona and Modelo in the U.S., has been a rare grower among big beer brands, and its stock has traded at a premium to the group, so high expectations might have played a role. On the earnings call, management dismissed concerns that a broad, downward trend in alcohol consumption is hurting business. Two analysts downgraded the stock.

The biggest miss of late came from Lamb Weston, which makes french fries. Back on Dec. 19, it missed Wall Street sales and profit estimates by large margins, sending shares down 20%. The company replaced its CEO with its former COO. Activist investor Jana Partners called the financial results "disastrous" and the management change to another insider "a stick in the eye." Lamb said on the earnings call that hamburger chain traffic dipped during the quarter. Asked if obesity drugs were playing a role, management said it wasn't seeing that. It blamed inflation, and promotional deals that include small-size fries. Too many customers, it said, are trading down from medium.

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.

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January 24, 2025 14:11 ET (19:11 GMT)

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