{"id":20265,"date":"2021-08-22T21:43:41","date_gmt":"2021-08-22T21:43:41","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=20265"},"modified":"2026-03-31T13:59:30","modified_gmt":"2026-03-31T13:59:30","slug":"momentum-valuation-indicators","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/momentum-valuation-indicators\/","title":{"rendered":"Momentum Valuation Indicators"},"content":{"rendered":"<p><script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Earnings surprise calculation\",\r\n    \"text\": \"Suppose a stock has reported quarterly earnings of $8.35 and expected earnings of $7.90. The earnings surprise would be closest to:\\n\\nA. 0.45\\nB. -0.45\\nC. 8.35\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"A (0.45). Earnings surprise is calculated as reported earnings minus expected earnings: 8.35 \u2212 7.90 = 0.45.\"\r\n    }\r\n  }\r\n}\r\n<\/script><\/p>\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/0kMmbenpFuo\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\r\n\r\n<p>Momentum indicators relate to price or a fundamental, such as earnings, to the time series of their past values or the fundamental\u2019s expected value.<\/p>\r\n\r\n\r\n<p>There are three major momentum indicators:<\/p>\r\n\r\n\r\n<ul class=\"wp-block-list\">\r\n\t<li>Earnings surprise.<\/li>\r\n\t<li>Standardized unexpected earnings.<\/li>\r\n\t<li>Relative strength.<\/li>\r\n<\/ul>\r\n\r\n\r\n<h2 class=\"wp-block-heading\">Earnings Surprise\/Unexpected Earnings<\/h2>\r\n\r\n\r\n<p>Unexpected earnings (also called earnings surprise) are the difference between reported earnings and expected earnings.<\/p>\r\n\r\n\r\n<p>$$\\text{UE}_{\\text{t}}=\\text{EPS}_{\\text{t}}-\\text{E}(\\text{EPS}_{\\text{t}})$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(\\text{UE}_{\\text{t}}=\\) Unexpected earnings for quarter \\(t\\).<\/p>\r\n<p>\\(\\text{EPS}_{\\text{t}}=\\) Reported earnings per share for quarter \\(t\\).<\/p>\r\n<p>\\(\\text{E}(\\text{EPS}_{\\text{t}})=\\) Expected EPS for the quarter.<\/p>\r\n<div style=\"margin: 20px 0;\"><a style=\"display: block; width: 100%; text-align: center; padding: 10px; border: 2px solid #2f5bea; border-radius: 40px; font-size: 16px; color: #2f5bea; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice unexpected earnings questions with our free trial. <\/a><\/div>\r\n<h3>Example: Earnings Surprise\/Unexpected Earnings<\/h3>\r\n<p>A stock with reported quarterly earnings of $2.05 and expected earnings of $2.00 would be considered to have a positive earnings surprise of $0.05. The percent earnings surprise would be \\(\\frac{0.05}{2.00}=0.025\\ \\text{or}\\ 2.5\\%\\).<\/p>\r\n<h2>Standardized Unexpected Earnings (SUE)<\/h2>\r\n<p>SUE scales unexpected earnings by a measure of the size of historical forecast errors or surprises. The underlying principle is that the lower the historical size of the forecast error, the more meaningful the given forecast error.<\/p>\r\n<p>It is calculated as:<\/p>\r\n<p>$$\\text{SUE}_{\\text{t}}=\\frac{\\text{EPS}_{t}-\\text{E}(\\text{EPS}_{\\text{t}})}{\\sigma[\\text{EPS}_{t}-\\text{E}(\\text{EPS}_{\\text{t}})]}$$<\/p>\r\n<p>Where:<\/p>\r\n<p>\\(\\text{EPS}_{t}=\\) Actual EPS at time \\(t\\).<\/p>\r\n<p>\\(\\text{E}(\\text{EPS}_{\\text{t}})=\\) Expected EPS at time \\(t\\).<\/p>\r\n<p>\\(\\sigma[\\text{EPS}_{t}-\\text{E}(\\text{EPS}_{\\text{t}})]=\\) Standard deviation of \\(\\text{EPS}_{t}-\\text{E}(\\text{EPS}_{\\text{t}})\\).<\/p>\r\n<h2>Relative-Strength Indicators<\/h2>\r\n<p>They compare a stock\u2019s performance during a period with its past performance or with the performance of a group of stocks. This indicator is often scaled to 1 in the beginning period for ease of interpretation. If the stock outperforms the index, the relative strength indicator will be greater than 1.<\/p>\r\n<blockquote>\r\n<h1>Question<\/h1>\r\n<p>Suppose a stock has reported quarterly earnings of $8.35 and expected earnings of $7.90. The earnings surprise would <em>closest to:<\/em><\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>0.45.<\/li>\r\n\t<li>-0.45.<\/li>\r\n\t<li>8.35.<\/li>\r\n<\/ol>\r\n<h3><strong>Solution<\/strong><\/h3>\r\n<p><strong>The correct answer is A.<\/strong><\/p>\r\n<p>$$\\begin{align*}\\text{UE}_{\\text{t}}&amp;=\\text{EPS}_{\\text{t}}-\\text{E}(\\text{EPS}_{\\text{t}})\\\\&amp;=8.35-7.90\\\\&amp;=0.45\\end{align*}$$<\/p>\r\n<\/blockquote>\r\n<p>Reading 25: Market-Based Valuation: Price and Enterprise Value Multiples<\/p>\r\n<p><em>LOS 25 (p) Describe momentum indicators and their use in valuation.<\/em><\/p>\r\n\r\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-block; padding: 10px 26px; background: #3f78d7; color: #fff; border-radius: 40px; font-size: 16px; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\r\n<p style=\"margin-top: 10px; max-width: 600px; margin-left: auto; margin-right: auto; font-size: 14px;\">Solve CFA Level II questions on earnings surprises and momentum valuation indicators.<\/p>\r\n<\/div>","protected":false},"excerpt":{"rendered":"<p>\ufeff\ufeff Momentum indicators relate to price or a fundamental, such as earnings, to the time series of their past values or the fundamental\u2019s expected value. There are three major momentum indicators: Earnings surprise. Standardized unexpected earnings. Relative strength. Earnings Surprise\/Unexpected&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[216,402,490,474],"class_list":["post-20265","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-cfa-level-2","tag-equity-valuation","tag-momentum-valuation-indicators","tag-reading-29-market-based-valuation","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Momentum Valuation Indicators Explained<\/title>\n<meta name=\"description\" content=\"Learn momentum valuation indicators such as earnings surprise, standardized unexpected earnings, and relative strength.\" \/>\n<meta name=\"robots\" content=\"index, follow, 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