From time to time, I check in and display items that are circulating in Wall Street circles and blogs.
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Long-term market and economic trends.
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Additional details about what you think is undervalued or overvalued.
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Links to great explainers of concepts.
**All as of April 18, 2023
Wall Street is playing corporate earnings season like a game of craps. In craps, you win if the first roll of the dice (called the “come out roll”) rolls a 7 or 11, and if it rolls a 2, 3, or 12 (called “craps”) loses.
Any other number rolled is a “point” and you must roll another point before rolling a 7 to win.
In this analogy, Wall Street sees the outcome of the rollout as follows:
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7 or 11 —> Earnings and revenue growth have exceeded all expectations, and future management guidance provides a positive surprise for the company. Stocks go up.
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2, 3, or 12 —> Earnings and revenue growth are below most expectations, and forward guidance at the time of earnings release contains a significant negative surprise. Stocks go down.
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point —> This is where things get fuzzy. What is essentially important is the value that Wall Street analysts and their financial models place as the fair value of a company’s stated earnings growth. The direction of a stock’s price is determined by whether the analysts are right or wrong, and by how much.
Total revenue for S&P 500 companies in the first quarter of 2024 is expected to be just +2.2% year over year, despite a +3.4% increase in sales.
This follows +3.8% growth in Q3 2023 and impressive revenue growth of +6.8% in Q4. No wonder the market rebounded late last year.
What is fascinating and important to understand is how the 2024 revenue growth estimate (+2.2%) has changed over the past three months as new information has come to light; How does it affect stock prices?
A “talking point” where growth rates are continually revised downwards after troubling news such as temporary interest rate cuts or energy price increases, making “positive” surprises more likely when companies release their actual numbers. I kept moving it over and over again.
Unfortunately, despite low expectations, company reports provided an even worse reality. We’re now seeing that reckoning, as reality has met Wall Street’s all-too-rosy expectations over the past three months.
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What are your thoughts? Have a question? Comment?
Reach out!Maybe I’ll do a full post on this topic or post it as a Q&A
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