MW Wall Street hated these 15 stocks. Then their earnings proved the analysts wrong.

By Mark Hulbert

Earnings beats mean a lot more when it happens to stocks the market gave up on

Not every earnings surprise is actually a surprise. In fact, very few of them are. That's why the stock market no longer rewards a positive earnings surprise to the extent it used to.

Consider how routine it has become to beat the Wall Street consensus earnings estimate. According to FactSet, in fact, no fewer than 85% of S&P 500 SPX companies did so in the first quarter of this year. The five-year average is 78%. Several decades ago this percentage was close to 50%, which is what you'd expect if Wall Street analysts weren't systematically lowballing their earnings estimates.

One of the consequences of this trend has been the deterioration of strategies exploiting what's known as "post-earnings announcement drift," or PEAD. Decades ago, when beating the consensus really meant something, a stock with a positive earnings surprise could be expected to beat the market for several months after its earnings announcement. In recent years, however, the profitability of PEAD strategies has declined to near zero.

One small group of stocks is an exception: companies for which Wall Street's consensus recommendation is negative. Expectations for such stocks are so low that a positive earnings surprise in fact is a genuine surprise - and these stocks on average do experience a post-earnings announcement drift.

Credit for discovering this phenomenon goes to Odhrain McCarthy, a finance professor at New York University's Abu Dhabi campus. In his study "Prior-Biased Inference in Asset Prices: The Conditional Post-Earnings Announcement Drift." McCarthy reports that PEAD strategies remain profitable in the case of stocks whose earnings surprises are "recommendation-inconsistent" - that is, buy-rated stocks with a negative earnings surprise and sell-rated stocks with a positive surprise.

McCarthy argues that "recommendation-inconsistent" stocks experience a PEAD for the same reason that all earnings surprise stocks used to: It takes the market time to digest new information. It's just that earnings surprises for "recommendation consistent" stocks are not really surprises, so there is little to no new information to digest. But in the case of "news that conflicts with established beliefs," it still takes a good amount of time to do that.

An example is World Kinect (WKC), for which Wall Street's consensus rating is 3.7 on a 1-to-5 scale where 1 indicates "strong buy" and 5 indicates "strong sell." WKC is one of Wall Street's least-liked stocks, since the vast majority of stocks have a consensus Wall Street rating of 1 or 2. Fewer than 1% of companies in the Russell 3000 RUA index have a lower rating than WKC, according to LSEG data.

Despite Wall Street's negative view of the company, on April 23 it reported first-quarter EPS of 75 cents - far exceeding the consensus expectation of 31 cents. Since then, its stock has outperfomed the S&P 500 by about 14 percentage points.

The table below lists negatively rated stocks that reported a positive surprise for first-quarter earnings. I limted the table to stocks with at least $5 billion of market cap and a consensus rating of 3 or worse. The stocks are listed in descending order of their surprise, as calculated by LSEG.

 
TICKER  STOCK                                       Wall Street Consensus Rating  Q1 2026 EPS Surprise (%)  Recent Market Cap ($ billion) 
ARW     Arrow Electronics Inc                       3.0                           +83.0%                    11.0  
AES     AES Corp                                    3.0                           +82.1%                    10.5  
KMX     CarMax Inc                                  3.0                           +48.3%                    6.2  
QRVO    Qorvo Inc                                   3.0                           +40.0%                    9.5  
IESC    IES Holdings Inc                            3.0                           +37.7%                    13.8  
EXPD    Expeditors International of Washington Inc  3.1                           +28.7%                    20.8  
BF.B    Brown-Forman Corp                           3.1                           +25.1%                    12.0  
KVUE    Kenvue Inc                                  3.0                           +22.0%                    33.9  
EXP     Eagle Materials Inc                         3.1                           +21.8%                    6.8  
HPQ     HP Inc                                      3.1                           +21.0%                    22.9  
BAX     Baxter International Inc                    3.1                           +17.0%                    9.9  
PRU     Prudential Financial Inc                    3.1                           +16.5%                    34.9  
KHC     Kraft Heinz Co                              3.0                           +15.3%                    29.0  
MRNA    Moderna Inc                                 3.0                           +14.2%                    18.8  
        W. R. Berkley Corp                          3.1                           +13.5%                    23.9  
                                                                                                            Source: LSEG 

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

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-Mark Hulbert

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June 03, 2026 08:10 ET (12:10 GMT)

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