Why do we still place so much emphasis on analyst expectations for corporate earnings?
Right after Apple Inc. announced its profits on Tuesday, the first news reports all fixated on just how badly the tech giant missed earnings estimates of $10.37 (U.S.) per share. The main message: this was horrible news.
And yet, Apple still made almost $9-billion last quarter. $9-billion.
I'm not saying analyst expectations never matter. They're built into most stock prices, meaning investors buy and sell based on them leading up to an earnings announcement, so an earnings miss will almost always have an effect on the share price.
But this effect is almost always short-term. Just because a company has one quarterly blip doesn't mean it's setting a long-term trend. Last quarter the global economy went back on the rocks, so it makes sense the consumers were more cautious with their money. We need quarters to pass before we can really throw in the towel on Apple.
More importantly, for any company with explosive growth like Apple's, it's practically impossible to predict where earnings will come in. Analysts are often smart people, but they're effectively trying to shoot an arrow at a moving target.
Analysts shouldn't be paid to tell us where they think earnings will come in. They should be able to coherently explain what the earnings mean and what to watch out for. They're in the business of analysis, after all.