Why does a stock’s price seem to fall after it beats expectations?

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adam123
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Joined: Thu Jan 16, 2014 4:51 pm

Why does a stock’s price seem to fall after it beats expectations?

Post by adam123 »

While the data may not bear out my anecdotal observations, for the few stocks I occasionally track, I tend to notice that even though that stock may blowout earnings expectations, it falls in the immediate short term (though goes back up in the intermediate).

This volatility is why I stick to index investing, but I’ve always wondered why a stock which by its nature is underestimated would drop after a great earnings report when you would think it would go up. Why does this happen (or am I wrong), or why does my guess on the effect of good news seem to be so off?
Last edited by adam123 on Fri Jul 30, 2021 11:00 am, edited 1 time in total.
MAKsdad
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Re: Why does a stock’s price seem to fall after earnings beat?

Post by MAKsdad »

Earnings beat is just one piece of data that's released. There are other things, particularly future outlook, that could influence the stock price. If the company beats today, but their future outlook is lower than expected, that impacts things. If the company beats, but they beat because of lower expenses (as opposed to more revenue) that's not always good. etc. etc. etc.

Edit to add: I've been around a lot of public companies in my career. Many times, their CFOs aren't even sure what the stock is going to do after the release earnings.
Boglegrappler
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Re: Why does a stock’s price seem to fall after earnings beat?

Post by Boglegrappler »

I've seen the same phenomenon.

My take is that it arises from people who are certain that the earnings announcement is great and will make the stock "pop" up, and they plan to sell into that action, since they've made a lot of money on the stock and are getting nervous and want to sell some. They are waiting for the announcement, and there are too many of them showing up at the same time after the announcement.

My impression is that, without additional negative information about lower expectations, these are temporary blips.
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arcticpineapplecorp.
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by arcticpineapplecorp. »

Think about the following conversation:

Q: How's business going?
A: Amazing. We beat expectations. Business has been great. I don't see how it can get any better.

Would a business that "can't get any better" be a business you'd want to buy or sell?
It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
NS_Bane
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by NS_Bane »

when you say "expectations", what you are referring to are analyst expectations. Individual analysts at financial firms publish their forecasted expectations for a company's earnings.

What you are asking assumes the following:
a dozen analysts publish their expectations ->
all buyers and sellers in the entire stock market adjust their expectations for future earnings to those dozen analysts ->
after earnings are published, all buyers and sellers in the stock market suddenly change their mind and change their opinions from those dozen analysts.

That could be true. Or much simpler, the market has ignored those dozen analysts and when a company announces earnings that "beat" those analysts' expectations, the earnings still haven't beaten the collective expectation of the entire market, so the stock drops.

In fact I don't even think what I wrote above is true. "drops" and "gains" within a single trading day are noise and have very little correlation to actual events.
livesoft
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by livesoft »

I guess some folks don't remember that reported earnings can be manipulated and really do not mean much. Before 2000, it seems that many stocks "beat expectations" by 1 cent pretty much routinely. Those crafty CFOs knew what they were doing.
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ckangas
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by ckangas »

NS_Bane wrote: Fri Jul 30, 2021 11:17 am when you say "expectations", what you are referring to are analyst expectations. Individual analysts at financial firms publish their forecasted expectations for a company's earnings.

What you are asking assumes the following:
a dozen analysts publish their expectations ->
all buyers and sellers in the entire stock market adjust their expectations for future earnings to those dozen analysts ->
after earnings are published, all buyers and sellers in the stock market suddenly change their mind and change their opinions from those dozen analysts.

That could be true. Or much simpler, the market has ignored those dozen analysts and when a company announces earnings that "beat" those analysts' expectations, the earnings still haven't beaten the collective expectation of the entire market, so the stock drops.

In fact I don't even think what I wrote above is true. "drops" and "gains" within a single trading day are noise and have very little correlation to actual events.
And if you look at companies like Tesla, the current price implies stronger expectations from the market than analysts.
MAKsdad
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by MAKsdad »

livesoft wrote: Fri Jul 30, 2021 11:22 am I guess some folks don't remember that reported earnings can be manipulated and really do not mean much. Before 2000, it seems that many stocks "beat expectations" by 1 cent pretty much routinely. Those crafty CFOs knew what they were doing.
I had a few clients that were really good at doing just that!
SteveDB
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by SteveDB »

There are many traders (fundamental analysis type) that position themselves before an event (e.g. earnings) and exit from few seconds to 30mins after the event.

I think this may result is depressed price gain after a beat in earnings.
TropikThunder
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by TropikThunder »

Also, earnings reports are not just the numerical data released without context. Rather there is a lot of background info released with it, often including a summary and analysis statement from the CEO. I imagine it's analogous to the market's reaction to changes (or lack of changes) in interest rates by the Fed. The commentary that accompanies the numbers can have more of an impact than the numbers themselves.
Hoongajji
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by Hoongajji »

Why did a Tickle me Elmo Doll sell for 600% more on eBay than the off the shelf at Walmart price?

People and the market are weird.

TSLA, AMZN, FB, the chip manufacturers, the pharmas, MSFT, AAPL are discombobulated in valuation. These similar but macro price spike and valuations equal, portray and exceed the prior Elmo Christmas profiteering madness. The indexes are second hand contaminated by this also.

Stock beats the expectation. Yet price decreases. The expectation of the analyst? Did the rating agencies not fail miserably in 2007? Who holds the ratings and the analysts accountable?

BOA has TSLA targeted at $795 per share. Based on that they presumably bought it lower. If you believe them...they profit.

Hoongajji Capital has VTI targeted at $50,000 per share btw.

Expectations are greedy insanity or hope.

Reality is fundamentals. Your personal checkbook is reality. A mega corporation is just more zero’s. You cannot fake the numbers. Or con the conman.
reln
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by reln »

adam123 wrote: Fri Jul 30, 2021 10:25 am While the data may not bear out my anecdotal observations, for the few stocks I occasionally track, I tend to notice that even though that stock may blowout earnings expectations, it falls in the immediate short term (though goes back up in the intermediate).

This volatility is why I stick to index investing, but I’ve always wondered why a stock which by its nature is underestimated would drop after a great earnings report when you would think it would go up. Why does this happen (or am I wrong), or why does my guess on the effect of good news seem to be so off?
Market expectations are different than average analyst expectations.
SgwayMontrose
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by SgwayMontrose »

Plus don’t forget the old “buy the rumor, sell the news”
hi_there
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Re: Why does a stock’s price seem to fall after it beats expectations?

Post by hi_there »

I don't know if stocks actually fall more often than rise after their earnings beating expectations. But anyway, I think there are different types of earnings "expectations" that are relevant to stock prices:

1) Earnings targets published by stock analysts, which are used in news reports
2) "Whisper number" earnings, which are numbers that analysts might actually expect, but are not published for some reason - for example, research might just not be up to date, clustering phenomenon, analysts not wanting to appear too bullish, and so on
3) Market price expectations (invisible hand)

Stock prices might not respond in the same direction as 1) if 2) and/or 3) are different. Add this noise to forward guidance as well as other details of the earnings report.
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