In recent years, more and more companies have announced quarterly earnings that have beaten analysts expectations.
“This is likely attributable to Investor Relations officers guiding the Street analysts to an earnings number the companies know they can beat,” says Rich Bernstein of Richard Bernstein Advisors.
As such, the information that comes from a positive earnings surprise is pretty much worthless.
However, we’re in the thick of Q2 earnings season and so far we’ve heard a lot of announcements that have fallen short of expectations.
Because expectations are now for companies to beat expectations, a negative earnings surprise is that much more of a disaster.
“The information content within negative earnings surprises has increased,” says Bernstein. “A negative surprise shows that the bad results were worse than the IR spin (i.e. worse than the company expected).”
Here’s the chart Bernstein submitted to us when we asked him for a chart he watches very closely:
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