What is Earnings Momentum
Earnings momentum occurs when corporate earnings per share (EPS) growth is accelerating or decelerating from the prior fiscal quarter or fiscal year. Earnings momentum typically coincides with accelerating revenues and expanding margins caused by increased sales, cost improvements or overall market expansion.
Earnings momentum is also an investment strategy that attempts to invest in companies experiencing an increase in share price due to positive earnings momentum, or growth in EPS.
BREAKING DOWN Earnings Momentum
Due to the quarterly reporting system required by the SEC, most earnings momentum analysis will rely on quarterly data, as the smaller reporting period can highlight momentum more clearly if it exists.
Investors are always on the lookout for positive earnings momentum, as it will usually propel a stock price higher over time, depending on how anticipated the momentum is. Earnings multiples (as in the P/E ratio) are the foundation for most stock prices, and if earnings are increasing at a faster clip than expected, then current multiples can quickly appear too low. As a result, investors will bid up the stock to reach a new level of equilibrium.
On the other hand, if earnings momentum falls away, the price of the underlying stock may drop despite the fact that earnings as a whole are still increasing.