The Importance of Expectations
Market observers are well aware of the immediate price reaction when a company’s quarterly earnings beat expectations, or fall short.
Perhaps not quite as widely understood, is the significance of broader economic estimates. Over the last several years, economists have consistently underestimated economic strength, both in the U.S. and internationally. As a result, we have seen a series of positive surprises and economists have reacted by frequently raising estimates. However, these increases in expectations have continued to be too conservative. As a result, stock markets have reacted favorably to a succession of economic “beats”, by going up.
To the extent that economic forecasts continue to be too low, markets may continue to respond positively.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®