The Impact of Earnings on Stock Price

Most volatility happens at the individual stock level when publicly listed companies in the major indexes $Dow Jones Industrial Average(.DJI.US)$,  $Nasdaq Composite Index(.IXIC.US)$, $S&P 500 Index(.SPX.US)$ report their quarterly or annual earnings. Good earnings that beat market expectations, analyst upgrades following earnings report and other positive business developments announced during earnings conference can lead investors to be willing to pay a higher price for the stocks. On the contrary, disappointing earnings, analyst downgrades after earnings, and negative business developments could cause investors to lose interest, which may push the stock price down. Despite announcing higher earnings, companies like $Apple(AAPL.US)$, $Alibaba(BABA.US)$, $Amazon(AMZN.US)$, $Facebook(FB.US)$, $Futu Holdings Ltd(FUTU.US)$, $Microsoft(MSFT.US)$, $Netflix(NFLX.US)$ have witnessed their stock price slide. This could be attributed to market expectations being overly optimistic on their earnings, the good earnings factor being priced in prior to the earnings or simply just profit taking. In some cases, a company can post an earnings beat while also lowering its earnings guidance which can disappoint investors and lower the stock price. Understanding earnings can help one to learn to be a better investor. As a long term investor, I use earnings as a guide to evaluate company fundamentals instead of trying to guess and trade around big moves on earnings day. What matters more is where a company will be many years from now. I would use earnings to make sure that my investment thesis still holds. Instead of being overly concerned about earnings beats and analyst upgrades, I would pay more attention to what a company's management says and compare it to what they do. Long term investors should focus on a company's potential to increase its earnings over many years. Ultimately, rising earnings will help to push stock price higher.