Quarterly financial reports play a vital role on Wall Street, as they help investors see how a company has performed and what might be coming down the road in the near-term. And out of all of the metrics and results to consider, earnings is one of the most important.
The earnings figure itself is key, of course, but a beat or miss on the bottom line can sometimes be just as, if not more, important. Therefore, investors should consider paying close attention to these earnings surprises, as a big beat can help a stock climb and vice versa.
The ability to identify stocks that are likely to top quarterly earnings expectations can be profitable, but it's no simple task. Here at Zacks, our Earnings ESP filter helps make things easier.
The Zacks Earnings ESP, Explained
The Zacks Earnings ESP is more formally known as the Expected Surprise Prediction, and it aims to grab the inside track on the latest analyst estimate revisions ahead of a company's report. The idea is relatively intuitive as a newer projection might be based on more complete information.
The core of the ESP model is comparing the Most Accurate Estimate to the Zacks Consensus Estimate, where the resulting percentage difference between the two equals the Expected Surprise Prediction. The Zacks Rank is also factored into the ESP metric to better help find companies that appear poised to top their next bottom-line consensus estimate, which will hopefully help lift the stock price.
Bringing together a positive earnings ESP alongside a Zacks Rank #3 (Hold) or better has helped stocks report a positive earnings surprise 70% of the time. Furthermore, by using these parameters, investors have seen 28.3% annual returns on average, according to our 10 year backtest.
Stocks with a #3 (Hold) ranking, which is most stocks covered at 60%, are expected to perform in-line with the broader market. But stocks that fall into the #2 (Buy) and #1 (Strong Buy) ranking, or the top 15% and top 5% of stocks, respectively, should outperform the market. Strong Buy stocks should outperform more than any other rank.
Should You Consider Microsoft?
The last thing we will do today, now that we have a grasp on the ESP and how powerful of a tool it can be, is to quickly look at a qualifying stock. Microsoft (MSFT) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $4.72 a share eight days away from its upcoming earnings release on October 28, 2026.
Microsoft's Earnings ESP sits at +0.29%, which, as explained above, is calculated by taking the percentage difference between the $4.72 Most Accurate Estimate and the Zacks Consensus Estimate of $4.71. MSFT is also part of a large group of stocks that boast a positive ESP. Make sure to utilize our Earnings ESP Filter to uncover the best stocks to buy or sell before they've reported.
MSFT is just one of a large group of Computer and Technology stocks with a positive ESP figure. Dynatrace (DT) is another qualifying stock you may want to consider.
Slated to report earnings on November 4, 2026, Dynatrace holds a #3 (Hold) ranking on the Zacks Rank, and its Most Accurate Estimate is $0.50 a share 15 days from its next quarterly update.
The Zacks Consensus Estimate for Dynatrace is $0.49, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +1.83%.
MSFT and DT's positive ESP figures tell us that both stocks have a good chance at beating analyst expectations in their next earnings report.
Find Stocks to Buy or Sell Before They're Reported
Use the Zacks Earnings ESP Filter to turn up stocks with the highest probability of positively, or negatively, surprising to buy or sell before they're reported for profitable earnings season trading. Check it out here >>
Should You Invest in Microsoft Corporation (MSFT)?
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This article originally published on Zacks Investment Research (zacks.com).