Lessons › Fundamentals and news › Results day: expectations versus reality

World 7 · Fundamentals and news · lesson 3 · level 2

Results day: expectations versus reality

On results day the price reacts to the surprise, not just to whether the numbers were good or bad.

In one line

On results day the price reacts to the surprise, not just to whether the numbers were good or bad.

Explained simply

Imagine everyone expects you to score 90 on a test, and you score 85: it is still a good mark, but people are disappointed. Company results work the same way. The price moves on the gap between what was expected and what actually happened.

The lesson

Before a company reports, analysts publish estimates, and the price already reflects what people expect. A result better than expected is a beat and a worse one is a miss, but the company's outlook, called guidance, often moves the price more than the past quarter. That is why good results can still send a price down and weak results can send it up. Results often come out while the market is closed, so the reaction can arrive as a gap at the next open.

A worked example

Illustrative example: analysts expect EPS of 2.00 and the company reports 2.20, a beat of 0.20 (2.20 minus 2.00), or 10% (0.20 divided by 2.00 times 100). But it also cuts its guidance for next year's EPS from 9.00 to 8.10, a drop of 0.90 (9.00 minus 8.10), or 10% (0.90 divided by 9.00 times 100). Traders may care more about the weaker future than the better past, so the price can fall despite the beat.

The same idea at four levels

1. Beginner. On results day, the price reacts to the surprise compared with expectations.
2. Foundation. Better than expected is a beat, worse is a miss, and close to estimates is in line.
3. Intermediate. Guidance, the company's outlook, often moves the price more than the quarter just reported.
4. Advanced. Record profits can still send a price down if guidance is cut, and a miss can lift it if guidance is raised.
5. Expert. Experts stay flat or size small into results, because the reaction often arrives as a gap that no stop can prevent.

Mistakes to avoid

• Assuming good results always mean a rising price.
• Holding a large position into results without a plan for a gap.
• Ignoring guidance and looking only at the past quarter.

Goal of this lesson: Understand why prices react to results compared with expectations, not to the results alone.