Last Updated on February 25, 2025
Overview – What’s the Big Deal With Expected Earnings?
Every time companies are about to release their quarterly or annual financial data, there’s a lot of information to go over, but the one thing that most people keep a close eye on is how the reported financial data compares to specific earnings expectations.
The specific metric that’s usually monitored is earnings per share and whether or not it meets (or, better yet, exceeds) targets. Some investors, analysts, and pundits are quick to celebrate when reported earnings meet or exceed expectations but are just as quick to panic when they don’t.
So, are expected earnings worth stressing over, or can they safely be ignored?
Expected Earnings Are Valuable, but Don’t Overestimate Their Importance
Although it’s easy to dismiss expected earnings as nothing more than educated guesses, doing so would be unwise. That’s because these expectations can reveal (or at least, hint toward) certain bits of information or insight.
Earnings projections can help investors understand the general sentiment toward certain companies, particularly the sentiments of major players such as banks, brokerages, and research firms.
Different analysts from various sources will report their expected earnings for a multitude of companies, usually well in advance of a given company’s quarterly and annual financial data being released. These expectations are usually compared to the previous quarter’s, or the previous year’s, data on a per-share basis.
For example, if multiple sources are expecting a given company’s upcoming quarterly earnings per share to be higher than the previous quarter’s, and for the annual earnings per share to be higher than the previous year’s, it may be wise for investors to figure out where this optimism is coming from and if it’s justifiable. Conversely, if various expected earnings projections are anticipated to be lower in the upcoming quarter/year, it may be worth figuring out why.
If used correctly, expected earnings figures can even help investors uncover potential investment opportunities they can pursue in the future, or avoid potential disasters waiting to manifest.
Although expected earnings can help point investors in the right direction and reveal potential insights, it’s important not to give them too much credit.
Expected earnings are just that—expectations, not foolproof predictions of what is to come. Some estimates may be overly optimistic, while others seem a bit too conservative: it all depends on how those specific figures were calculated, which will inevitably vary based on where they come from and the specific procedures that were followed when creating them.
Despite this, so many investors, both large and small, continue to put too much emphasis on expected earnings, and because of that, increases the likelihood of making poor decisions.
If Expected Earnings Are Missed or Exceeded, What Should Investors Do?
Whenever earnings season rolls around, that is, when multiple companies release their quarterly or annual financial data in proximity to one another, financial markets can get very hectic, to put it nicely. During this time, investors, analysts, pundits, and various other groups keep a close eye on how reported earnings compare against expectations.
When reported earnings more or less match expectations, not much happens, and markets usually hum along. However, the problem is what happens when reported earnings exceed or miss expectations and what swiftly follows: overreaction.
When many companies, or a handful of large/closely watched ones, report earnings that exceed expectations, financial markets are quick to rise, taking the stronger-than-anticipated data as a sign of economic strength and cause for future optimism. On the flip side, financial markets are quick to decline whenever reported earnings fall short of expectations, interpreting it as a sign of impending economic weakness.
When faced with reported earnings that either exceed or fall short of expectations, how should investors respond?
One of the first things they’ll want to do is to stop, collect their thoughts, and not give in to any irrationality currently going on around them. Doing this first is important because it will be required for what comes next: resisting the urge to make any sudden moves.
If reported earnings are stronger than anticipated, it’s tempting to fall victim to the market’s hype and think it’s time to go on a buying spree. Similarly, one of the first things that may cross an investor’s mind in the face of weaker-than-expected earnings is “Sell before it’s too late”.
However, both approaches will prove to be equally damaging because both will be driven almost entirely by emotion instead of logical thought. Unless they have a very compelling reason to do so, it’s usually best not to act during this time and to wait things out. Remember, choosing to do nothing can also be a valid course of action.
Consistency Is More Important Than Meeting (Or Falling Short Of) Expectations
Imagine a company has, for years, repeatedly matched, either a bit above or sometimes below, the expected earnings figures thrust upon them. Then, for the next couple of quarters, something unexpected happens: they fall short of expected earnings by a significant margin. Is it time to start panicking? Any sensible investor would probably reply with “no”, and will instead take the time to figure out what happened.
Like investors, there are a multitude of factors that are well beyond a company’s ability to control that can affect them and their financial performance such as global economic conditions, political uncertainty, one-time events, or bouts of volatility, to name a few.
The opposite is also true: a company that has consistently reported weak financial data and then suddenly exceeds expectations doesn’t mean it’s time to start celebrating. Just as multiple external factors can weigh down a company’s financial performance, so too are there factors that can temporarily prop it up.
Exceeding earnings expectations doesn’t mean it’s time to start celebrating, nor does missing it means it’s the end of the world. When it comes to any sort of numerical data, consistency is far more important than trying to keep up with externally imposed expectations.
Naturally, most companies do their best to try and live up to expectations to maintain investor confidence, but they understand that there’s only so much they can do. If their earnings are affected by factors they cannot hope to control, then so be it. So long as they can hover close to expected earnings, then that’s usually more than enough.
Meanwhile, companies that obsess with trying to exceed expectations no matter what may employ some “creative”, or outright illegal, measures to achieve that.
This isn’t to say that surpassing expectations is a bad thing, but if a given company is always doing so, even if most of its peers cannot achieve the same feat, then there’s reason to believe that some financial dishonesty may be going on.
Wrapping Up
It’s said that “Expectation is the root of all heartache”, and indeed, many investors continue to fall for this trap.
Expected earnings figures are pervasive in today’s investment landscape. It seems like almost every company has expectations thrust upon them, and investors wait anxiously to see how reported earnings compare to expectations. This isn’t to say they have no utility: expected earnings can shine some light on how certain groups feel about a given company’s prospects and investment merit based on what they expect earnings to be like.
However, expectations are not foolproof predictions, and in the end, ultimately hold no weight. Despite this, so many investors, observers, pundits, and other market participants are quick to overreact when reported earnings exceed or fall short of expectations.
Investors are better off observing long-term consistency in financial performance instead of hyper-fixating on whether reported earnings can live up to the expectations of others.
