Earnings Estimate

  

There's an old saying on Wall Street: "Buy on the rumor; sell on the news." The point of this old chestnut is that the stock market largely moves on anticipation. People make their (sometimes very gaudy) livings by getting into stocks ahead of everyone else. There's a lot of money to be made being early...as long as you're right.

All this is to say that there's a high premium placed on guessing what's going to happen on Wall Street. The underlying driver of action in the stock market is corporate earnings. Shares represent ownership in companies and rise in value as the companies involved make money.

So that gives us the two basic engines of stock trading: guessing stuff...and corporate results. Which leads to the following equation: guessing stuff + corporate results = earnings estimates.

Wall Street banks and brokerages employ a small army of really smart people (known generally as analysts) whose entire jobs involve guessing what companies will report when they announce their results. (Well, sometimes there are conflicts of interest with the companies being covered, so it's not always entirely true that an analyst's sole job involves accurately predicting results. But it's a big part of it anyway, even if they don't always publicly issue their full, unabashed opinions.)

When a company announces its results (See: Earnings Announcement), the stock will largely move based on how the company's reported metrics compare with the estimates going into the release. If the company beats expectations, there's a good chance the stock will rise. If it misses expectations, the stock will likely fall.

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Finance: What is forecasting?8 Views

00:00

Finance allah shmoop what is forecasting one better than three

00:08

casting Okay so forecasting in a financial sense isn't all

00:11

that different from the crazed witchy ramblings of a medium

00:15

in a say aunts divine ing your future dating life

00:18

not necessarily on tinder which she and tones will be

00:21

cloudy with a chance of rejection Our company's forecast future

00:25

revenues and profits as driven by sales volumes and usually

00:29

and the pricing of whatever products they're moving out the

00:32

door Why like why bother Well you sell so many

00:35

units of your product what can you do about it

00:38

Well in practice there's plenty you can do about it

00:41

Let's say you won huge discounts and extruded plastic volumes

00:45

for your sneeze guard business The snot thickens any way

00:49

at all that you get in return for ordering five

00:52

years supply Your supplier loved knowing well in advance what

00:56

the demand would be for their extruded plastic so that

00:59

it could negotiate with its unions It's plastic mining contracts

01:04

its natural gas supplier teo melt the plastic and so

01:07

on So in return for a lot of commitment came

01:10

a lot of discounting You've now committed to buy five

01:13

years worth of extruded plastic supplies no matter what Like

01:17

twenty five tons this year thirty tons next thirty five

01:20

the next and so on But after year to the

01:21

economy softens and buffets have decided to cave to the

01:25

germs They aren't just buying enough sneeze guards Toe warrant

01:28

your commitment of thirty five tons of extruded plastic Well

01:31

what can you dio a cry Yes you always do

01:35

that Be wine and blame washington That's a good one

01:38

that always works Or see Spend money on marketing and

01:42

discounting to just quote get through it unquote So yeah

01:45

the answer to see you're on the hook for thirty

01:47

five tons no matter what So rather than have it

01:49

just pile up in the back of a factory you

01:51

lower prices and spend a bit more on marketing And

01:54

instead of only needing a twenty seven tons that the

01:57

existing market would have had you send out the door

02:00

you stimulated demand Five tonnes worth They now have thirty

02:03

two tons needed Teo get sent out for snot guards

02:07

and yes that three tons less And you really wanted

02:09

to sell But it's not terrible You don't go bankrupt

02:12

in three tons of plastic fits right here in the

02:14

back of the factory yard Thing neither Yeah that stuff

02:18

is heavy So through forecasting which letyou know very early

02:21

the softness in the market demand for your sneeze guards

02:24

you were able to stave off what could have been

02:27

a calamitous slow down or even shutdown bankruptcy or whatever

02:31

in production Yeah and that's nothing to sneeze at Gross

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