[[Start here]] → [[expose to return drivers|drivers]] → [[strong stocks beat weak stocks|momentum]] → price jumps --- ![[price jumps on earnings announcements predict future drift-1.png]] When a company surprises the market with an unexpected upside earnings surprise, the stock price typically jumps on the announcement day. But what’s less appreciated is that the _size of that jump itself_ - the “Earnings Announcement Return” (EAR) - contains predictive power for what happens next. The larger the EAR, the stronger the drift (_Post-Earnings Announcement Drift or PEAD_[^2] in the lingo) . Research by Brandt[^1] shows that stocks with the biggest one-day gains after earnings go on to rise further - by around 8% over the next six months. ![[price jumps on earnings announcements predict future drift.png]] Markets underreact - and good news diffuses into the consensus over months. Investors are too anchored to their old expectations and brokers update their views only slowly, so prices adjust in ratchets - the first day reaction isn’t strong enough. Earnings surprises also tend to follow one another. A company that beats once often beats again. This can create the the step-like “box pattern” described by Nicholas Darvas in his brilliant “*How I Made $2,000,000 in the Stock Market*”. It’s a simple playbook - jump, drift, pause, repeat. ## At Stockopedia I ran a big research study on 10 years of trading statements and found that big jumps on trading statements were very predictive of future returns in the UK market. You can find out more about that [here](https://www.stockopedia.com/academy/reports/ahead-of-expectations-how-trading-updates-drive-share-price-momentum/). ## Related notes * [[momentum reverses in the short term]] - (this is the short term corollary) * [[momentum continues for three to twelve months]] - often powered by the drift ## **Sources:** [^1]: Brandt et al. (2024) _Earnings Announcements Are Full of Surprises_ · [^2]: Ball & Brown (1968) · Bernard & Thomas (1989)