Earnings are arguably the most important single number on a company's quarterly financial report. Wall Street clearly dives into all of the other metrics and management's input, but the EPS figure helps cut through all the noise.
Life and the stock market are both about expectations, and rising above what is expected is often rewarded, while falling short can come with negative consequences. Investors might want to try to capture stronger returns by finding positive earnings surprises.
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.
In fact, when we combined a Zacks Rank #3 (Hold) or better and a positive Earnings ESP, stocks produced a positive surprise 70% of the time. Perhaps most importantly, using these parameters has helped produce 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 General Dynamics?
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. General Dynamics (GD) holds a #3 (Hold) at the moment and its Most Accurate Estimate comes in at $3.61 a share 30 days away from its upcoming earnings release on July 23, 2025.
General Dynamics' Earnings ESP sits at +4.16%, which, as explained above, is calculated by taking the percentage difference between the $3.61 Most Accurate Estimate and the Zacks Consensus Estimate of $3.47. GD 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.
GD is one of just a large database of Aerospace stocks with positive ESPs. Another solid-looking stock is Axon Enterprise (AXON).
Axon Enterprise, which is readying to report earnings on August 5, 2025, sits at a Zacks Rank #3 (Hold) right now. It's Most Accurate Estimate is currently $1.88 a share, and AXON is 43 days out from its next earnings report.
The Zacks Consensus Estimate for Axon Enterprise is $1.54, and when you take the percentage difference between that number and its Most Accurate Estimate, you get the Earnings ESP figure of +22.21%.
GD and AXON'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 >>
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General Dynamics Corporation (GD): Free Stock Analysis Report Axon Enterprise, Inc (AXON): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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