Earnings and Stock Price Correlation

Discussion in 'Psychology' started by pcgeek86, Jan 12, 2007.

  1. Ok, a friend of mine believes that stock price and earnings are directly related "99.9999% of the time".

    This is obviously not the case, but I'm poor at explaining technical things in English ... how would you explain the fact that this isn't true?
  2. Daal


    just plot any a chart of big companies with the earnings reports. you can do it at bigcharts. you have the market reacting in the opposite of they it 'should' do pretty often
  3. One reason I decided that fundamental analysis wasn't working for me, heh ...
  4. Daal


    in the long run it does
  5. well, that's true it does ... but swing traders and day traders care much less for earnings than other indicators though. Am I right?
  6. Daal


    its very important for them, the stock might react differently than it should but it will react and they can make or lose their shirt with it
  7. Isn't it normally only relevant just before and after earnings reports though? I mean, it doesn't have any serious effect on the stock price in the middle of earnings reports? Maybe I'm missing something ...
  8. Daal


    of course it has. say google tomorrow reported zero earnings, you tell me that wouldn't have an effect during the day reported?surprises makes stocks move
  9. kwancy


    In my own opinion, not that fundamental analysis is flaw or something. Different traders will have look at different parameters based on their strategies and time-frames. Any type of analysis has its pros and cons.

    One of the "theory" of stock price is the expectation theory (fundamental analysis). Investors and traders evaluate the price today based on the expectation of the company's future performance in their time-frame by looking at a wide array of factors (interest rate (alternatively the FX), macro-economic trend, management, sales...etc). Earnings happen to be one of the many fundamental factors that people will look at in their forecast (P/E multiple for stock selection). You can challenge your friend if the math of the DCF model reflect the price or not using historic dividends. That way you can show how naive he is for looking at a single dot and claiming of seeing the whole picture.

    And specifically for earnings, it is prone for accounting manipulation based on how aggressive the company wants to report it. Therefore, it's stupid to think that earning and earning alone can reflect the fundamental of the company as a whole. What about Cash flow?? balance sheet?? most importantly the footnotes!

    I am not a fundamentalist as majority of the members of ET are. Open for friendly discussion!
  10. Thanks for your insight kwancy. I guess my question I was trying to answer was: how does a stock price fluctuate during periods inbetween earnings reports? Sure, maybe a company releases a positive earnings report one quarter, but after the hype is over, the stock price often drops as sharply as it went up. I think the answer I've found from some various articles online is that there is no set in stone answer ... it's supply and demand. That's why I believe that technical analysis, more specifically, trends in stock price and other indicators, is a better ... indicator of future stock price.

    It all depends on someone's goals though. I do believe that for long-term investors, they're better off keeping a consistent record of past earnings, present earnings, and future earnings projections.
    #10     Jan 13, 2007