Personal Investor: Four earnings season myths
The earnings parade has begun. Investors, analysts, pundits and journalists are sifting through the latest results from publicly-traded companies trying to look their best.
But what do the beats, meets and misses really tell investors?
Earnings expectations are based on a mix of company projections and analyst estimates. In many ways it’s a game where companies try to boost their stocks by being seen as under promising and over delivering.
WhisperNumber.com, an alternative earnings website, has compiled four earnings season myths that could sway your view about the ritual of earnings season.
Myth #1: The stock will rise when a company reports earnings that beat.
Over time, there is no proven correlation that this occurs with the majority of earnings reports. In fact, studies have proven there isn't anything surprising about earnings surprises. They aren't the exception; they are the rule.
According to a study by Bianco Research, over 15 consecutive quarters, 66 per cent of the companies in the S&P 500 earned more than the consensus, or median, forecast by analysts. Only a small majority of the companies tracked experienced price strength following their earnings reports.
Myth #2: The stock market as a whole will earn higher returns after periods with more positive surprises.
This is considered a 'macro' earnings myth, expanding on myth #1. There is no reliable evidence that earnings surprises have a long-term impact on the broader markets.
Myth #3: Analysts.
Most big research firms are associated with brokerages. Since changes in earnings forecasts encourage many investors to buy or sell, it is believed analysts have an incentive to revise their predictions more often. But that hasn't made the forecasts more accurate. On average, according to Denys Glushkov, research director at WRDS, stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago.
Myth #4: The mainstream financial media covers the most relevant earnings.
When it comes to the data they provide viewers, WhipserNumber says it really comes down to each journalist’s individual preference. They say media sources are not independent influences looking to provide the best possible data. They are looking to provide what they know, are comfortable with, and prefer.