If a stock’s price is the reflection of the company’s earnings potential, as investors are told, then next week’s market action will be important. And investors have been led to believe corporate earnings won’t be that bad.
Expectations are about as important as a company’s actual financial results, at least in the short term. The financial industrial complex churns out profit and loss forecasts for thousands of companies. Some firms help by releasing their own forecasts. Others stay quiet until their day arrives for them to release their quarterly numbers. But almost all are measured on that judgment day against Wall Street’s expectations.
Because of that, companies have an incentive to warn if their financial performance won’t live up to expectations. Get the bad news out early in hopes of reducing the stock price drop. Companies have less motivation to announce that profits will be bigger than predicted. Hold on to the good news until earnings day in hopes of a stock price rally.
As the third-quarter earnings season kicks off next week, fewer companies in the S&P 500 stock index have warned about their quarterly performance. It’s the lowest number of negative notices in three years.
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Investors won’t ignore the incessant chatter around the Federal Reserve, but a shift in the market’s focus to corporate performance could be temporarily calming.
Financial journalist Tom Hudson hosts The Sunshine Economy on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.