Real Earnings Versus “Whisper Earnings”

Susan Jung |

As we continue to press forward with this quarter’s earnings season, market volatility continues to be significant based on the numbers companies report. What is often perplexing to investors is why sometimes companies are volatile even if they report earnings that were officially in line with expectations. It adds to the mystery and confusion of market movements and can be perplexing unless one understands what drives the volatility.

When companies report earnings, market participants watch to see if expectations were met. But it is important to recognize that the publicly stated expectations are not the only number that matters to investors. There is a secret unpublished number called the “whisper number” that also is an important consideration for investors. The “whisper number” is the earnings expectation for a company that has not been publicly stated. It’s a hunch, a feeling, a thought about what might be really happening separate from the expected number.

Here’s an example. Let’s suppose a company is expected to post earnings of $1 per share according to analysts and investors. One might think that this is the only expectation that needs to be met for a company to have provided a satisfactory quarterly report; that might not be the case. Perhaps the standard number is $1 dollar per share but analysts may secretly think that if everything goes really well, the company might report earnings of $1.10 per share. This sets up a situation where if a company reports a $1 per share, analysts might be disappointed because it didn’t meet the “whisper number” (even if it met the explicitly stated expectations of the analyst community).

Sound crazy? Perhaps, but remember markets are not simply trading based on facts; sentiment matters as well. In addition to the conflict between explicit expectations and “whisper numbers”, company stocks can be impacted by the guidance provided during earnings calls. Let’s say a company reported solid earnings that exceeded expectations as well as whisper expectations. But during the conference call, the CEO of the firm states that she/he expects difficulties ahead as the company handles a particular business problem. Furthermore, let’s imagine the CEO states that it may affect future earnings and profitability. In that case, it is entirely possible that a company could negatively be impacted in the market based on these statements on future expectations.

Short-term movements based on earnings are always perplexing. More importantly, it’s a virtually impossible game to try to figure out on the short price movements of assets because of the unknown variables surrounding each quarter’s earnings release. This is why fundamental analysis is so critical as it examines the cash flows on an intermediate and long-term basis for a business enterprise to make a determination about the relative value of a given asset. Old-fashioned fundamentals matter and we believe should be a core component of one’s decision-making process. At Destination Wealth Management, it is.

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