Tesla stock shows a curious pattern before and after earnings that you can trade

By Mark Hulbert

Shares typically decline during the two weeks ahead of earnings and gain over the following two weeks

This pattern is not a marketwide phenomenon but is specific to Tesla.

Don't be surprised if Tesla's (TSLA) stock declines over the next two weeks and then rises over the following two weeks. That's because Tesla is slated to report earnings on July 17, and more often than not in recent years, its stock has suffered over the two weeks prior to reporting earnings, and then rallied over the next two weeks. This pattern is illustrated in the chart below, which shows Tesla's stock since it joined the S&P 500 SPX in 2021.

Over the past 12 earnings cycles, Tesla's stock in the two weeks after it reported earnings has performed close to 10 percentage points better than in the two weeks prior, on average. (Specifically, the shares gained 6.7% on average in the post-earnings two-week period, versus minus-2.9% over the two weeks prior.) These are raw, unannualized numbers; on an annualized basis the difference is huge. The difference between the S&P 500's average return in these before-and-after periods is essentially zero, so what the chart is showing is not a marketwide phenomenon but specific to Tesla.

The reason to focus on the period since Tesla joined the S&P 500 is that managing earnings expectations becomes significantly more important for companies in this index, to which thousands of mutual funds are benchmarked. Companies that engage in the practice will try to lower investors' expectations prior to reporting earnings, in order for the reaction to those earnings to be more positive.

According to an analysis by MacroMicro, a data analytics firm, 77.2% of S&P 500 firms in the first quarter of 2024 beat earnings expectations - far higher than what you'd expect because of chance. This expectations-beating percentage has been growing: 10 years ago the comparable proportion was 65%, and the trend since then has been steadily upward.

Should you make a short-term bet on Tesla's pre- and post-earnings pattern? The answer depends on how confident you are that the market has yet to catch on to it. Eventually, all exploitable patterns get discounted away, and all too often they stop working the moment you try to profit from them.

This is especially important to keep in mind since earnings management is hardly unknown. Years ago, for example, one of the more profitable stock market anomalies was to invest in companies with a positive earnings surprise and avoid those with negative surprises - a phenomenon known as "post-earnings announcement drift" (or PEAD).

In recent years, however, according to researchers, PEAD has largely disappeared as a market-wide phenomenon. This play may still exist in certain pockets of the market, however. In theory, expectations management will be most possible for companies whose earnings are the least predictable.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More: Tesla is reporting quarterly sales soon. Investors are bracing for lower numbers.

Plus: Tesla stock cracks $200 ahead of deliveries. What else is moving the stock.

-Mark Hulbert

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07-02-24 1857ET

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