---
description: "Ranks stocks by standardized unexpected earnings (SUE) and buys high-SUE winners while shorting low-SUE losers, capturing post-earnings announcement drift."
tags: [stocks, momentum, earnings]
---

# Earnings-Momentum

**Section**: 3.2 | **Asset Class**: Stocks | **Type**: Momentum

## Overview
Earnings-momentum is structurally the same as price-momentum — buying winners and selling losers — but the selection criterion is based on earnings surprises rather than price returns. Stocks that beat earnings expectations tend to continue outperforming, while those that miss tend to continue underperforming (post-earnings announcement drift, PEAD).

## Construction / Signal
The primary signal is the Standardized Unexpected Earnings (SUE) [Chan, Jegadeesh and Lakonishok, 1996]:

```
SUE_i = (E_i - E_i') / sigma_i                           (274)
```

Where:
- `E_i` = most recently announced quarterly earnings per share for stock `i`
- `E_i'` = earnings per share announced 4 quarters ago (same-quarter prior year)
- `sigma_i` = standard deviation of the unexpected earnings `(E_i - E_i')` over the last 8 quarters

Stocks are sorted by `SUE_i` in descending order.

## Entry / Exit Rules
- **Entry**: Buy stocks in the top decile by SUE; short stocks in the bottom decile by SUE. Construct as a dollar-neutral portfolio.
- **Exit**: Typically hold for 6 months (holding period typically 1–6 months); diminishing returns beyond 6 months.
- **Rebalance**: Quarterly, coinciding with earnings announcement cycles.

## Key Parameters
- **SUE lookback for sigma**: 8 quarters
- **Comparison period**: 4 quarters prior (same-season comparison)
- **Holding period**: Typically 6 months
- **Portfolio construction**: Dollar-neutral long/short decile portfolio

## Variations
- Alternative unexpected earnings definitions (analyst consensus vs. same-quarter-prior-year)
- Combining SUE with price-momentum for a blended signal

## Notes
- Typical holding period is 6 months; diminishing returns for longer holds.
- PEAD is one of the most robust anomalies in the literature but can be reduced by trading costs given earnings are released quarterly.
- The strategy is exposed to earnings announcement timing and may require frequent universe refreshes.
- Can be combined with price-momentum strategies (see Section 3.6 Multifactor Portfolio).