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There is no better chance to observe how the stock market absorbs new information than during earnings season.

Companies that fail to measure up to expectations risk incurring the wrath of the market, which tends to handle bad news poorly, according to new research.

A report from Richardson GMP shows that investors generally overreact to disappointments such as earnings misses.

And with a pivotal first-quarter earnings season under way in Canada and the United States, that creates opportunities for traders to buy stocks that have been overly punished, said Craig Basinger, chief investment officer at Richardson GMP.

“Negative news just causes people to react much more aggressively, and more emotionally."

But as the initial surprise wears off, the following trading day typically sees the offending stock partly bounce back in search of a new equilibrium, according to the report.

Take Methanex Corp. as an example. The chemical company fell well short of consensus earnings estimates when it released its financial statements after the close of trading last Wednesday.

The next day, the stock declined by 5.3 per cent to a two-and-a-half month low. The day after that, however, Methanex shares rallied by 2.3 per cent. That pendulum effect is in keeping with a marketwide pattern, according to GMP analysts.

Their research looked at the companies in the S&P Composite 1500 Index over the past five years, identifying all the times any stock in that index had a big move outside its normal volatility range – about 15,000 instances.

The GMP team tracked stock performance in the days following a significant news event, showing markets typically backtracking on big downside moves. In the next day of trading after a substantial drop, those stocks outperformed the market by an average of about 0.25 per cent, with that gap widening to more than 1 per cent after 10 days.

The initial sell-off may be fuelled by institutional investors who have the resources to quickly digest breaking news and change their positions accordingly. But eventually, value investors come in and act as stabilizers, Mr. Basinger said. “Those investors view the price drop as an opportunity.”

The current earnings season is proving fertile ground for investors looking for weakened targets.

While nearly 70 per cent of S&P 500 Index companies have beaten their earnings forecasts, the market is currently fixated on the laggards.

Earnings beats have outperformed the broader market by a thin 1.1 percentage points, on average, the next trading day, while misses have lagged by 3.8 percentage points, according to a Merrill Lynch note.

“The bigger reaction from misses makes sense given how dramatically estimates had been cut heading into the quarter,” Merrill’s strategists wrote.

As recently as two weeks ago, consensus forecasts were for U.S. earnings to decline year over year for the first time since early 2016, as global trade tensions and rising U.S. labour costs clouded the corporate outlook.

Commentary from management on earnings calls have been generally upbeat on the macroeconomic backdrop, said Christine Poole, chief executive of Toronto-based GlobeInvest Capital Management.

“The demand scenario they're facing doesn't seem to be as bad as feared,” Ms. Poole said. “The consumer is still in good shape, and unemployment is low.”

U.S. first-quarter earnings are now expected to rise by 0.7 per cent over last year, according to Refinitiv data.

Meanwhile, it’s still early days in Canadian earnings season, with less than 20 per cent of S&P/TSX Composite Index companies having reported. Prominent misses among them include Restaurant Brands International Inc., Canadian National Railway Co. and Rogers Communications Inc., which saw one-day share price declines of between 1 per cent and 3 per cent.