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%. Stock prices are gener

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%. 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.