Stock prices can rise and fall based on a company’s earnings performance because profits reveal the financial health of a company and also indicate the economic conditions for earning profits moving forward. There must be a distinction between long-term investors and short-term traders. Long-term investors may not be swayed by one quarter of disappointing earnings, but short-term traders tend to think more immediately and favor short-term profits.
It stands to reason that comparisons used in quarterly profit results are performance versus analyst expectations and performance versus the year-ago period. Investors are often quick to reward a stock that surpasses the earnings expectations set by financial analysts and whose profits exceed levels achieved in the previous year.
But the stock market is a “what have you done for me lately” institution. While it is not always feasible for a company to provide early earnings guidance, investors have proved they prefer companies to be as transparent as possible as soon as possible when it comes to profit performance. Whether a company has good or bad news to share, investors want to know in which direction profits are trending before the actual announcement.