Jul 25, 2016
Personal Investor: Four earnings season myths
By Dale Jackson
With earnings season in full swing, markets will be looking for the companies that beat, meet or miss. That magic number can move a stock, and even the entire stock market.
But according to independent earnings researcher Whisper Number, earnings season is based on myths that can send investors in the wrong direction.
Myth #1: A company’s stock will rise when it reports earnings that beat expectations
Perhaps in the short term, but Whisper Number says over time there is just no proven correlation that this occurs with the majority of earnings reports. In fact, studies show there isn't anything surprising about earnings surprises. They aren't the exception; they are the rule.
According to Bianco Research, over several quarters 66 per cent of the companies in the S&P 500 earned more than analysts’ consensus estimate. It found a minority of the companies in the index that beat expectations 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
Whisper Number calls this is a 'macro' earnings myth, and is a carryover from myth #1. Simply put, there is no reliable evidence to support this premise.
Myth #3: Analysts analyze
Whisper Number puts analysts in the ranks of unicorns and Bigfoot when it comes to myths. It claims they are merely pawns incentivized to change company ratings to generate more trading, and more commissions for their brokerage firms.
Whisper Number goes on to say ratings revisions don’t make the forecasts more accurate. Stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago. And while the typical forecast missed the mark by one per cent in the 1990s, that margin of error has been running at triple that rate.
Myth #4: Mainstream financial media focus on the most important companies
Whisper Number says it really comes down to each journalist’s individual preference – companies they tend to cover or take a personal interest.
“They are looking to provide you with what they know, are comfortable with, and prefer.”
