3 ms·
I guess what makes me so skeptical about this is the magnitude of change in expectations that relatively minor news can bring. I would say that a rational perso
by jamesaguilar 13y ago
I guess what makes me so skeptical about this is the magnitude of change in expectations that relatively minor news can bring. I would say that a rational person should not, for example, value Google or Facebook 20% less or more more because of a single quarter's performance. I feel like one of three things must be the case:
- A slight miss or hit of earnings expectations in a quarter
really can make a rational person change their valuation
of a company by 20%.
- The market is irrational.
- The spot price doesn't accurately represent the market.
It's harder for me to believe the first two than the last one.
- jcnnghm 13y agoA slight miss or hit of earnings expectations in a quarter really can make a rational person change their valuation of a company by 20%. Stock prices are generally considered to be the present value of all future cash flows. In other words, growth prospects are priced in. Because of this, missed earnings can seriously effect value because they can dramatically change market beliefs about probable future cash flows and growth potential. Smaller stocks and high P/E ratio stocks (broadly, growth companies) are particularly vulnerable because the present value of future growth is a higher part of the total value. Edit: Forgot to mention, empirical data typically suggests that markets initially under-react to earnings surprises.