There is an extensive stream of research that documents a positive association between earnings surprises and stock returns at the individual firm level. We posit that individual firms’ earnings surprises have systematic and firm-specific components that differ in their persistence, implying that the market reaction to individual firms’ earnings surprises should depend upon the relative magnitudes of the underlying systematic and firm-specific earnings surprise components. We further posit that investors behave as if they solve a signal extraction problem that allows them to estimate from aggregate (e.g., market-wide) earnings the systematic earnings surprise component. Our signal extraction framework implies that the market reaction to individual firms’ earnings surprises is increasing in the cross-sectional mean earnings surprise and that the magnitude of the mean effect is inversely related to the cross-sectional dispersion of the earnings surprises. Our results are consistent with these predictions. We also find that both Reg FD and limited attention affect signal extraction. Overall, our results suggest that to understand the market reaction to individual firms’ earnings announcements, one must consider aggregate earnings.