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This might sound like a dumb question (I'm relatively new to the stock market). I know this doesn't happen, but why doesn't the stock price directly move in accordance to the earnings reported vs what analysts estimated?

For example, company XYZ releases their earnings report and it's an actual EPS of 11 vs. an expected EPS of 10 by Wall Street. Shouldn't their stock appreciate by 10% as soon as this happens?

I sometimes see companies beat earnings expectations yet they depreciate a bit. Why does this happen?

Chris W. Rea
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Nico
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3 Answers3

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The market is forward looking and share price tracks company earnings, thought not in a straight line linear correlation that you suggest. If a company reports earnings significantly higher than expected, its stock price tends to rise and vice versa.

Sometimes "companies beat earnings expectations yet they depreciate a bit." This is because there are other components that are problematic. The most consequential one is that earnings are up but the company lowers forward guidance (for example, think tariffs). Or perhaps they beat on earnings but fell short on revenues. So while they beat estimates, they failed to meet or they are projecting that they will fail to meet other metrics.

A perfect example of this was the EA of of Gartner (NYSE: IT) this morning. They announced solid second quarter 2019 results but lowered full-year guidance. Shares were down as much as 21%, closing at at $138.26, down $32.47 .

Bob Baerker
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Share price is total discounted value of future earnings (plus assets). A single quarter will be small portion of that. For instance, if the discount rate is 8%, then a single quarter is about 2% of the total value. So quarterly reports are not important for the current earnings as much as for the future outlook. Current earnings being 10% above expected will increase stock price by 10% only if the market is confident that that bump will be sustained. If current earnings are up 10% over expected, but the forecast is for the next five years of earnings to be down 5% below expected, then the stock price will decrease.

Acccumulation
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Unfortunately, it's not that simple nor is it that efficient. There are a few things to keep in mind.

  1. Stocks move based on perception not reality. Positive sentiment causes people to buy and negative sentiment causes people to sell. This leads into the next points.
  2. A company can report great earnings and poor guidance for the upcoming quarter. More often then not, the market will assign more weight to the poor guidance.
  3. An earnings "beat" doesn't always guarantee a positive response. Sometimes, you'll find that the market was expecting a higher earnings beat or very specific news.
  4. The total EPS is just one part of the earnings. The devil is in the details. For example, a company may report a good EPS but slowed sales in a key division.
  5. Earnings reports are quarterly so you can't value a company entirely on how they did in one three-month period.

There's a whole host of things that can impact the market's reactions to earnings. Most traders never play the earnings since they know its a coin toss.

daytrader
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