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Why earnings will be 'better than expected'

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Brendan McDermid/Reuters/File

(Read caption) A screen displays the final closing number for the S&P 500 index at the New York Stock Exchange in May 2013. Reports claiming that earnings were 'better than expected' are mostly due to companies revising their official earnings estimates at the last minute, Karlsson argues.

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It's the beginning of a quarter, meaning that it is time for earnings reports for the preceding quarter. One thing that we can say for sure is that most reports, at least in the U.S., will be "better than expected". The reason I can say this is not because I'm psychic (I'm not, unfortunately) nor because there is evidence to suggest companies really are doing better than expected, but because the official "earnings estimates" produced by official analysts are always lowered just before the reports so that they will almost always be "better than expected."

The case of Alcoa illustrates this. Until recently, the average official forecast was for quarterly per share earnings of about 20 cents, but the report showed a profit of only 7 cents per share. But since forecasts had been reduced to 6 cents just before the report, the headline still said "better than expected."

Why is this done? Because the companies producing these estimates have an economic interest in making people buy stocks. And by presenting most reports as "better than expected" while producing extremely over optimistic forecasts about the future, they hope to make people wanna buy those stocks, hoping that people won't notice how they almost always quietly lower these forecasts shortly before the reports.


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