Tom Explains the Relationship Between the Market and Earnings Reports
Transcript:
Katie Nealis:
So right off the bat, Tom, we have a great question in from a man who gives us many great questions Woody. And he’s asking Tom, after the closing bell on Thursday, CNBC folks seem a bit surprised over the down market after a good earnings report. What is their relationship?
Tom Vaughan:
Yeah, okay. That’s a really good question, actually, because there’s some interesting pieces there that are that are difficult to understand sometimes, first of all, say that the market is a forward looking mechanism. So when companies are reporting earnings, the price for the most part has already moved for those earnings some time ago. And the only thing that really happens when the earnings are released, is that sometimes there’ll be earnings are higher than expected, and you’ll get some motion forward because of that. So most of the motion that you would see based on the earnings that are expected has already happened before those earnings reports are reported. And so there’s not a lot that happens that day. Sometimes, you know, the earnings reports are pretty complicated. There’s all kinds of forward guidance and different things that happen, you know, along those lines, and somebody will say something, you know, even slightly negative and the stock will sell off, even though it had phenomenal earnings. I know that happened to Apple the last time for example, but in the end, the overall market is looking forward.
So on Thursday, the overall market is looking at, you know, hey, the Federal Reserve might be cutting back on bond purchases, and the Delta Variant is still growing. And it’s growing again, in the UK, and retail sales are down. And so there’s kind of this negativity that’s sitting on the market that wasn’t there before. Some of those things weren’t as expected. All of those are future looking things. And that can overwhelm positive earnings reports. There’s no doubt about that. And that’s why you often don’t see, you know, big moves after earnings, unless it’s just wildly surprising to the upside. Somebody had something that nobody expected to happen. And then sometimes you’ll see those stock move from that. But is a good question I get asked that a lot, actually, you got to always be thinking about, you know, what is going to be happening in the next six to 18 months, and then you’ll get a better idea for what’s happening with the market. So the markets more concerned about what the earnings will be for those companies six to 18 months from now. Right? So that’s, that’s the key. It’s a forward looking mechanism.
Easan Arulanantham:
I know a lot of companies, even though they’ve had relatively good earnings reports, they’ve also cut guidance for future quarters with slowdowns and expected supply chain issues. And so those issues could be slowing down the market, too.
Tom Vaughan:
Yeah, that’s exactly right. It fits right in with what I was saying the market is looking forward. And so they report their actual earnings, let’s say they were really good, even better than expected. But at the same time, they say, hey, in the next quarter, or the quarter after that depends on how much guidance they’re giving, you know, we’re expecting some softness, because of supply chain issues, or because of the Delta Variant or, you know, whatever it might be seasonality that comes along. And so that’s exactly right, that has more weight, oftentimes. And then there’s one other interesting thing, in my personal opinion, if you’re the CEO of a company, and your job is to beat these expectations, I’m not going to set them too high. So when I’m giving guidance, you know, if I think I can get to 10, I might tell you, I can get to eight. And then you know, if I get to 10 or 11, I look great, right? If I get if I tell you, I can get to 10 and I don’t get there, then I’ve got problems. So that’s that’s why you’ll often see guidance being a little bit low in terms of, you know, in my opinion, you know, why make the hurdle higher than you need to make it? And so yeah, that but it does fit that’s the forward aspect of looking at the market is looking forward. Not so much for what’s happening today, per se. Today is a confirmation of what was expected from the past. And what we’re really looking for is what’s going to happen tomorrow.