Expectation Arbitrage in Q4 Earnings: Measuring the Magnitude of Surprises

Market Reactions After Earnings: What Really Drives Stock Moves?

How stocks respond following earnings reports often reveals more than the numbers themselves. Take Palantir (PLTR) as an example: after reporting results, its shares soared 10%, highlighting a significant gap between what investors anticipated and what was delivered. While the market expected a solid performance, Palantir’s results—revenue up 70% and adjusted EPS climbing 79%—far surpassed those expectations. This wasn’t just a routine beat; it prompted a re-evaluation of the company’s prospects. The company not only exceeded the so-called “whisper numbers” (with revenue and EPS beats of 6% and 9%, respectively), but also raised its guidance. Given that the stock had recently dropped 12% on concerns about potential disruptions, the strong report was a welcome surprise.

In contrast, Cardinal Health saw its stock rise just 1.3% after reporting a 1.2% revenue beat and an 11.2% EPS beat. While the results were solid, they didn’t fundamentally change the outlook, as robust growth was already reflected in the share price. The company’s 18.8% year-over-year sales growth and raised guidance had set a high bar, so even a decent beat wasn’t enough to trigger a major rally. The market’s response was a classic case of “sell the news”—the results met expectations but didn’t exceed them by enough to spark excitement.

Boot Barn followed a similar pattern. The stock barely moved after reporting revenue and GAAP EPS in line with forecasts. The only notable surprise was a 14.4% beat in adjusted EBITDA, suggesting that investors were focused on headline figures, which were already anticipated. The EBITDA outperformance was a positive, but not enough to shift sentiment when the main metrics were already priced in. Here, the market saw little room for surprise.

Ultimately, how much surprise is already reflected in the stock price determines the reaction. Palantir’s outsized beat led to a sharp rally, while Cardinal Health and Boot Barn’s results were largely anticipated, resulting in muted moves.

The Expectation Gap: Outperforming and Raising Guidance

Looking at both the reported results and future outlooks reveals a clear hierarchy in market surprises. Palantir’s strong numbers alone would have justified a positive reaction, but the real driver was its raised guidance. The company posted Q4 revenue of $1.4 billion and adjusted EPS of $0.25, beating estimates by 6% and 9%. More importantly, Palantir projected first-quarter revenue of $1.5 billion and a full-year target near $7.2 billion—both above analyst forecasts. This combination of beating expectations and raising the outlook, especially after a recent sell-off, reset the market’s view of the company’s growth potential, particularly in AI.

Cardinal Health also delivered a solid quarter, with Q4 revenue of $65.63 billion (a 1.2% beat) and adjusted EPS of $2.63 (an 11.2% beat). The company’s adjusted EBITDA exceeded estimates by 10.7%, and management raised full-year adjusted EPS guidance to $10.25—a 5.1% increase. However, with strong growth already expected, these results weren’t enough to drive a significant rally. The market had already set a high bar, and the report simply confirmed it.

Boot Barn’s performance was the most closely aligned with expectations. The company reported revenue of $705.6 million and GAAP EPS of $2.79, both matching forecasts. The 14.4% beat in adjusted EBITDA to $155.2 million highlighted operational strength, but with headline numbers on target and only a slight guidance increase for the next quarter, there was little to surprise investors. The market had already factored in the company’s growth story.

In summary, for a stock to rally meaningfully, it usually takes both a strong earnings beat and a raised outlook. Palantir delivered on both fronts, while Cardinal Health and Boot Barn’s results were already anticipated by the market, limiting their upside.

Guidance: The True Market Mover

Investors often care more about what companies say about the future than about past results. Forward guidance is what resets expectations, and this quarter, it was the key differentiator among these stocks.

Palantir’s new full-year revenue target of $7.2 billion was a major upgrade, well above the roughly $6.3 billion analysts expected. After a period of uncertainty and a 12% decline in the stock, this forward-looking beat justified the 10% rally. It signaled that Palantir’s AI-driven growth story was not just a short-term trend, but a sustainable shift. The raised first-quarter guidance of $1.5 billion reinforced this new, higher baseline.

Cardinal Health’s guidance increase was more modest. The company lifted its full-year adjusted EPS target to $10.25 at the midpoint, a 5.1% bump. While this confirmed the company’s momentum, the market had already priced in strong growth, so the incremental raise supported only a small stock gain.

Boot Barn’s outlook offered little new information. Its Q1 revenue guidance of $530 million at the midpoint was slightly above expectations, but full-year EPS guidance was in line. With headline results already matching forecasts, the guidance simply maintained the status quo, giving investors no reason to adjust their views.

In the end, it’s often the outlook for the future—not just past performance—that moves stocks. Palantir’s raised guidance set a new standard, Cardinal Health’s modest increase confirmed its trend, and Boot Barn’s steady outlook left expectations unchanged.

Looking Ahead: Key Catalysts and Risks

The initial reaction to earnings is just the beginning. The real challenge for each company is to deliver on the higher expectations now set by the market.

• Palantir: The main risk is whether the company can achieve its ambitious $7.2 billion full-year revenue goal. After a strong rebound, the stock’s valuation now assumes a much steeper growth path. Sustaining the recent 137% surge in domestic sales and successfully translating AI investments into consistent revenue will be critical. Any misstep could quickly narrow the expectation gap that drove the rally.
• Cardinal Health: The company’s challenge is to maintain 19% non-GAAP EPS growth while revenue remains flat. The recent guidance increase was modest, and growth is being driven by operational improvements rather than top-line expansion. The market expects continued profit growth, so execution—such as integrating the Solaris Health acquisition—will be key. If operational gains falter, stagnant revenue could become a concern.
• Boot Barn: The focus is on turning aggressive store expansion into higher margins. The company plans to open 65 to 70 new locations in fiscal 2026, and last quarter saw a 210-basis-point merchandise margin improvement and a 23% rise in EPS. However, rapid growth and potential tariff costs (an $8 million headwind in the second half of the year) could pressure margins. Success will depend on quickly ramping up sales at new stores to offset these challenges and meet earnings targets.

In summary, each company’s recent stock move reflects a bet on its future. Palantir is banking on AI-fueled expansion, Cardinal Health on operational efficiency, and Boot Barn on disciplined growth. The coming quarters will reveal whether these raised expectations are met—or if investors will once again “sell the news.”