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Trader Q&A: How Should I Use Earnings Expectations?

Schwab’s Trading Services team discusses the difference between official earnings expectations and real expectations.

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[John] Yeah, so that's a really good question and I think probably all three of us, as we learn the finance business a little bit, we're like, "This company's great earnings," and then the stock goes down. So there's "earning expectations" and then there's the real expectation. If everyone expects something to happen and it happens, sometimes it's really a deflating incident, so people are like, "I've already priced that in. They didn't really beat what I expected, so I don't think the stock's as valuable as it was yesterday." That's what happens.

[Kevin] I completely agree. I think oftentimes what we'll see in the chart viewpoint is a security that might report earnings favorably and you see, more than likely, a sell the news type of mentality and people are looking to take profits frequently on an earnings announcement. And if you get that snowball rolling downhill, then a lot of others are going to step in and say, "Okay, this is my chance to profit. I'll allow that to happen. I'll look for my entry point a little later on," and frequently, you'll find securities that are showing that type of a trend, a very clear uptrend, sell off after earnings, giving you a nice, tight window, maybe a month or two where you have another opportunity to step in and trade it in advance of earnings. So it's stock-specific, I'd suggest, and a lot of times a lot of the reason for the selloff after earnings is based solely on the run up to earnings.

[Lou] And then a lot of times we're trying to figure out where that stock—what the future earnings might be and the company might beat today, which is great news, but then lower the expectations either on the revenue or on the sales side for the future, which is bringing down future expectations, which is a very big negative on the stock.

[John] And it might happen on the flipside too. Stock could miss earnings and then stock goes up.

 

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