The market is still waiting for that next rate cut from the Fed. Feels strange to think that we are at the cusp of a cutting cycle given stocks are right at all-time highs. Things are feeling a bit top heavy though, with the tariff pause ending and lots of countries being slapped with penalties for not coming to the table to negotiate in good faith.

That’s left the economy in a precarious position. We’ve already seen signs of an economic slowdown, with higher prices continuing to put consumers under pressure. Jobs numbers are starting to show signs of stress and the headlines have already seen some big names report some huge layoffs.

Despite that, the AI revolution continues to add fuel to the fire of productivity and profits in several big tech names. While that’s happening, Bitcoin is thriving, pushing up through all-time highs and gold continues to glitter above $3,300.

That is the story for the overall market. As for individual stocks, there will be big winners and losers depending on the strength of their reports. This brings to mind one of the most confusing things about earnings season:

Why do some stocks skyrocket on a positive earnings surprise while others fall off a cliff?

In this article we are going to tackle this little understood issue. Better yet, I will share with you two ways to profit from surprises this earnings season. More on that later.

3 Reasons Stocks Can Drop After a Positive Earnings Surprise

1) Estimates vs. Expectations: The standard definition of an earnings surprise is when actual earnings comes in higher than earnings estimates. But those estimates are the “published” numbers from the brokerage analysts. Quite often investors tend to develop their own unique set of expectations that can differ greatly from the Wall Street analysts. If there is too much optimism ahead of the release, then actual earnings will need to be a blowout in order to appease investors’ inflated expectations. This is the most common reason why some stocks fall after a “supposed” earnings beat.

2) Quality of Earnings: The highest quality earnings come from having robust revenue growth. This means that the company’s products or services are in high demand and should stay that way into the future. However, these days far too much of the earnings being reported is generated from cost cutting and other “accounting gimmickry.” The problem with that is that the benefits of these moves don’t last. When the market gets a whiff that the earnings are unsustainable, no matter how strong the beat, shares will most likely drop.

3) Forward Guidance: Plain and simple, when you buy a stock you are taking an ownership stake. And what owners of companies care about is the stream of future earnings. So if a company beats earnings for the quarter just reported, but warns that future quarters will see lower earnings, then that stock will go down… and go down fast.

2 Ways to Make Money on Earnings Surprises

So now that we have outlined things that can go wrong after an earnings surprise, let’s shift gears and talk about something even more important; How to turn a profit from earnings surprises. Here are two ways to go about it.

More . . .

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Buy These Stocks BEFORE They Report Earnings

Next week, 189 companies are scheduled to report earnings. What if you could know in advance which few would shock Wall Street by beating earnings expectations and pop in price?

Now you can.

Zacks proprietary “ESP” formula predicts positive earnings surprises with unthinkable 80% accuracy. That doesn’t mean we make money 80% of the time, but recent picks were closed for gains of +49.8%, +37.0%, and +28.5% in as little as 4 days.¹

Which stocks is the system picking today? Find out before doors close to new investors at midnight Sunday, July 13.

See Surprise Stocks Now >>

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1) Good Way: Buy shares in any company that had an earnings surprise and rose the day following the news. These stocks experience what academics call the “Post Earnings Announcement Drift.” Studies clearly show that these stocks usually outperform the market over the next 9 months. Conversely, you should sell any stock in your portfolio that misses its earnings numbers as it is likely to underperform the market for the next few quarters. The downside of this approach is that there are literally thousands of stocks to choose from every quarter.

2) Best Way: Find stocks where the earnings “whispers” tip you off that a big surprise is coming. Buy the shares shortly before the announcement and enjoy quick gains of +10%, +15%, +20% when the earnings surprise is officially reported.

I know what you’re thinking. There are no Magic 8-balls for the stock market, so how can this be possible??? But fret not; this isn’t a magic show. It’s pure science.

The concept of finding a profitable source of earnings whispers has long been the Holy Grail of stock investing. Many experts have tried and failed to make this work. In fact, we had been researching this for countless years.

Early on we found clues that identified stocks more likely to surprise, but not necessarily rise in price. It wasn’t until the summer of 2010 that we discovered the right combination of elements. Since refinements were made in 2014, the system has correctly called POSITIVE surprises a whopping 80% of the time with the vast majority accelerating in price.

The Easy Way to Apply This Breakthrough

In each earnings season, including this one, there are thousands of stocks that could announce positive surprises.

That is why the Zacks research team invested so much time and effort to create a special strategy that narrows down the lists. It detects rare companies that are most likely to both beat earnings and jump in price.

This drives the portfolio I am managing called the Zacks Surprise Trader.

Our system relies on two under-used signals coming from the brokerage analyst community. These two whispers are then layered on top of other proven elements such as the Zacks Rank and Zacks Industry Rank to find only the best stocks… in the best industries… with the best chances of beating earnings and quickly rising in price.

If you would like to receive our precise whisper trading signals through the heart of this earnings season, I invite you to look inside our Surprise Trader portfolio ASAP.

Now is the absolute best time to do it. From 189 companies scheduled to report earnings next week, I have locked onto a small handful of standouts predicted to exceed expectations and surge in price.

Don’t miss your chance to beat Wall Street to the punch and make the most of the potential double-digit price pops. Our signals predict big positive surprises and they’ve been right a remarkably consistent 80% of the time!

Of course, that doesn’t mean the portfolio makes money 80% of the time, but members following its picks have had the chance to close gains of +49.8%, +37.0%, and +28.5% in as little as 4 days.¹

Remember, it’s your chance to buy shares before earnings are reported and before other investors swarm in and drive up their prices.

Bonus Report: Another reason to look into this now is that you are also invited to download our just-released “Early Warning Alert” report. It reveals Stocks to Sell BEFORE They Report Earnings. Our strategy works both ways, and you can use this report to avoid companies that are more likely to report negative surprises in the coming weeks.

Don’t delay: entry closes to new investors at midnight, Sunday, July 13.

See our Surprise Trader stocks now >>

All the Best,

Dave

Dave Bartosiak is Zacks’ resident earnings surprise expert. He selects stocks and delivers daily commentary for our Surprise Trader portfolio.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research’s newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.

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