Thursday, February 01, 2007

Official vs. Real Expectations

Google profits are higher than "analyst expectations", yet the stock still falls in after-hours trading. Standard & Poor analyst Scott Kessler comments by saying "No matter how you look at it, they notably exceeded expectations. It's just that all the good news is already priced into the stock.". But if people have already priced in good news, doesn't that mean that their real expectations are much higher than their official expectations?

This is not a phenonema limited to Google. Just about every earnings season (i.e. every quarter) many, usually most, companies beat official expectations, with almost all remaining companied meeting official expectations, and only a handful missing official expectations. One would have thought that this systematic downward bias in official expectations would have induced Wall Street to re-evaluate their methods-unless, of course, it is deliberate so that every earnings season will be associated with "good news" no matter how bad the earnings are in a absolute sense, so that people will be more willing to buy stocks, using the brokerage services of the bank and brokerage firms that hire the analysts whose low forecast ensure that earnings will be "better than analyst's expectations".


Blogger Martin said...

This is the case quite often in FI and FX markets as well.
However, while consensus estimates may be beaten, they are gathered maybe a week before the statistics arrive and events during this week may alter economists and market expectations. (As is often the case with nf payrolls and also EMU HICP)

Then again, you rarely/never have data over people's positioning, i.e. the distribution of bets that people are taking.

If an outlying economists convinces one major player to take a certain bet, you'll see significant market reactions even if "consensus" is on spot.

8:46 AM  

Post a Comment

<< Home