This paper examines the predictability of future stock returns based on past returns, focusing on the market's underreaction to earnings news. It finds that both past returns and past earnings surprises predict large drifts in future returns, with little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Market risk, size, and book-to-market effects do not explain the drifts. Security analysts' earnings forecasts also respond sluggishly to past news, especially for stocks with the worst past performance. The results suggest a market that responds only gradually to new information. The paper explores the relationship between momentum strategies and the market's underreaction to earnings-related information. It finds that firms with unexpectedly high earnings outperform those with unexpectedly poor earnings, and this superior performance persists for about six months after earnings announcements. Similarly, prices respond sluggishly to revisions in analysts' earnings forecasts. These findings suggest that the profitability of momentum strategies may be due to the component of medium-term returns related to earnings news. If this explanation is true, then momentum strategies would not be profitable after accounting for past innovations in earnings and earnings forecasts. The paper also considers the possibility that the profitability of momentum strategies stems from overreaction induced by positive feedback trading strategies. This explanation implies that "trend-chasers" reinforce movements in stock prices even in the absence of fundamental information, so that the returns for past winners and losers are (at least partly) temporary in nature. Under this explanation, we expect that winners (losers) not associated with positive (negative) contemporaneous earnings information will subsequently experience reversals in their stock prices. Finally, the paper suggests that strategies based on past returns or earnings surprises (earnings momentum strategies) exploit market underreaction to different pieces of information. For example, an earnings momentum strategy may benefit from underreaction to information related to short-term earnings, while a price momentum strategy may benefit from the market’s slow response to information related to longer-term earnings. In this case, we would expect that each of the momentum strategies is individually successful, and that one effect is not subsumed by the other. The paper also provides evidence on the risk-adjusted performance of price and earnings momentum strategies. It confirms that drifts in future returns over the next six and twelve months are predictable from a stock's prior return and from prior news about earnings. Each momentum variable has separate explanatory power for future returns, so one strategy does not subsume the other. There is little sign of subsequent reversals in returns, suggesting that positive feedback trading cannot account for the profitability of momentum strategies. If anything, the returns for companies that are ranked lowest by past earnings surprise are persistently below-average in the following two to three years. Security analysts' forecasts of earnings are also slow to incorporate past earnings news, especially for firms with the worst past earnings performance. The bulk of the evidence thus points to a delayed reaction of stock prices to the information in past returns and in past earnings.This paper examines the predictability of future stock returns based on past returns, focusing on the market's underreaction to earnings news. It finds that both past returns and past earnings surprises predict large drifts in future returns, with little evidence of subsequent reversals in the returns of stocks with high price and earnings momentum. Market risk, size, and book-to-market effects do not explain the drifts. Security analysts' earnings forecasts also respond sluggishly to past news, especially for stocks with the worst past performance. The results suggest a market that responds only gradually to new information. The paper explores the relationship between momentum strategies and the market's underreaction to earnings-related information. It finds that firms with unexpectedly high earnings outperform those with unexpectedly poor earnings, and this superior performance persists for about six months after earnings announcements. Similarly, prices respond sluggishly to revisions in analysts' earnings forecasts. These findings suggest that the profitability of momentum strategies may be due to the component of medium-term returns related to earnings news. If this explanation is true, then momentum strategies would not be profitable after accounting for past innovations in earnings and earnings forecasts. The paper also considers the possibility that the profitability of momentum strategies stems from overreaction induced by positive feedback trading strategies. This explanation implies that "trend-chasers" reinforce movements in stock prices even in the absence of fundamental information, so that the returns for past winners and losers are (at least partly) temporary in nature. Under this explanation, we expect that winners (losers) not associated with positive (negative) contemporaneous earnings information will subsequently experience reversals in their stock prices. Finally, the paper suggests that strategies based on past returns or earnings surprises (earnings momentum strategies) exploit market underreaction to different pieces of information. For example, an earnings momentum strategy may benefit from underreaction to information related to short-term earnings, while a price momentum strategy may benefit from the market’s slow response to information related to longer-term earnings. In this case, we would expect that each of the momentum strategies is individually successful, and that one effect is not subsumed by the other. The paper also provides evidence on the risk-adjusted performance of price and earnings momentum strategies. It confirms that drifts in future returns over the next six and twelve months are predictable from a stock's prior return and from prior news about earnings. Each momentum variable has separate explanatory power for future returns, so one strategy does not subsume the other. There is little sign of subsequent reversals in returns, suggesting that positive feedback trading cannot account for the profitability of momentum strategies. If anything, the returns for companies that are ranked lowest by past earnings surprise are persistently below-average in the following two to three years. Security analysts' forecasts of earnings are also slow to incorporate past earnings news, especially for firms with the worst past earnings performance. The bulk of the evidence thus points to a delayed reaction of stock prices to the information in past returns and in past earnings.