Daily Update: Analyzing Evasive Answers and Equity Performance on Earnings Calls
Today is Friday, January 24, 2025, and here’s your curated selection of essential intelligence on financial markets and the global economy from S&P Global. Subscribe to be notified of each new Daily Update.
Investors have used analytical tools, including large language models, to analyze earnings call transcripts for many years. Previous research indicates that overall positive sentiment, transparency of numerical data and complexity of the language used, analyzed through natural language processing from earnings call transcripts, all correlate with future equity performance. This means that earnings call transcripts are a form of alternative data that some investors are leveraging to make investment decisions. A team at S&P Global Market Intelligence in the Quantitative Research & Solutions group recently found that other factors correlated with future equity performance in earnings calls: on-topic versus off-topic answers to analyst questions and proactive versus reactive approaches to issues raised by analysts.
Most analyst questions during earnings calls are expected. Company executives and sector analysts are aware of what concerns and questions are likely to emerge following prepared remarks. When company executives' responses to analyst questions are off-topic or reactive instead of proactive, this may indicate that the company is actively avoiding difficult issues.
The new research from S&P Global Market Intelligence indicates that excess stock returns can be attributed to proactiveness and on-topic alignment during earnings call Q&A. Firms with proactive and on-topic Q&A responses achieved an annualized gross profit growth deflated by assets of 31%, compared to 12% for reactive and off-topic counterparts. This outperformance could be due to investors' perception of lower risk or higher growth, leading to an expansion of the earnings multiple, or improved financial performance at the firm level.
This analysis is based on 192,000 earnings calls from Russell 3000 companies between January 2008 and September 2024. Each sentence from the entire corpus of S&P Global Market Intelligence Machine Readable Transcripts was assigned a numerical value to indicate thematic content. Scores were computed for similarity between analyst questions and executive answers to determine whether answers were on- or off-topic. Then, large language models derived synthetic responses for analyst questions from an executive’s prepared remarks. If a reasonable synthetic answer closely matching the content of the eventual answer could be derived, the researchers concluded that the prepared remarks proactively addressed analyst concerns.
Both factors correlate with future equity performance. Companies in the top 20% of on-topic alignment outperformed the bottom 20% by 390 basis points in the Russell 3000. Proactive executives outperformed reactive peers by 170 bps per year. Combining both factors yielded 506 bps per year in a long/short portfolio.
According to researchers at S&P Global Market Intelligence: “One interpretation is that firms with strong competitive positions and well-fortified economic moats can confidently address critical topics in their prepared remarks and provide on-topic responses when asked for clarification. In contrast, firms in weaker positions may signal vulnerability by avoiding key topics in prepared remarks and pivoting away from them during Q&A.”
Today is Friday, January 24, 2025, and here is today’s essential intelligence.
Written by Nathan Hunt.
Sustainability
Energy Transition Critic Saudi Arabia to Remain in Paris Climate Accord: Official
Middle East oil giant Saudi Arabia is still committed to the Paris climate agreement, a senior official told S&P Global Commodity Insights, despite its misgivings with how the energy transition is being administered globally and President Donald Trump's plans to withdraw the US from the accord. Better to stay in the Paris agreement and influence climate negotiations from within, the government official said, asking not to be named, adding that the full impact of the US' withdrawal, which would not take effect until 2026, remains to be seen.
—Read the article from S&P Global Commodity Insights
Economy
Subnational Government Outlook 2025: Capital Expenditure Shows Signs Of Slowing
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—Read the article from S&P Global Ratings
Capital Markets
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—Read the article from S&P Global Market Intelligence
Global Trade
Resumption of Red Sea Shipping Could be Near if Houthis Uphold Halt to Ship Attacks: PAJ Chief
A resumption of Red Sea shipping could be close if the Houthi rebels keep their word on the recently announced halt to ship attacks in the waterway, Petroleum Association of Japan President Shunichi Kito said Jan. 22. "If this turns out to be the actual situation or true, the resumption of Red Sea shipping could be near," Kito told a press conference in Tokyo, referring to a recent announcement from the Houthi fighters about ship attacks in the Red Sea.
—Read the article from S&P Global Commodity Insights
Energy & Commodities
The Essential Podcast, Episode 112: The United States LNG Impact with Madeline Jowdy and Mohsen Bonakdarpour
In this episode, host Nathan Hunt is joined by Mohsen Bonakdarpour from S&P Global Market Intelligence and Madeline Jowdy from S&P Global Commodity Insights to discuss the findings from part one of S&P Global's recent US LNG Impact Study.
—Listen and subscribe to the podcast from S&P Global
Technology & Innovation
Credit FAQ: GCC Telcos’ International Expansion: What, Why, How?
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—Read the article from S&P Global Ratings
Events & Webinars
Webinar: 2025 Technology Industry Credit Outlook (Jan. 28, 2025)
Please join S&P Global Ratings technology sector analysts for a live interactive webinar when they will provide their views on 2025 industry credit outlook.
—Register for the webinar from S&P Global Ratings
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