Investors Look to Corporate Reports With Low Expectations

However, all that information is immediately reflected in stock prices, or so the theory goes. That’s why investors and analysts pay such close attention to comments by corporate executives about how they see the future panning out, even if earnings calls are ostensibly held to talk about the past.

On these calls, analysts mix praise of management with pointed questions about the feasibility of their strategies. The discussion this quarter will probably focus on the effects of high inflation and interest rates, the likelihood of recession, and layoffs. Investors will also been listening for signals about the effect of China’s reopening as well as the impact of new taxes on corporate income.

And investors are wise to the common practice of executives talking down their companies’ prospects, giving themselves wiggle room for underperformance or simply a lower bar to beat and boost to their company’s stock price.

“Recent client conversations indicate some skeptical investors are wary that managements might low-ball” their latest results and the outlook for 2023, Goldman’s analysts wrote in a recent research note.

Yet there is also reason to be genuinely cautious.

Inflation remains stubbornly high, so the Federal Reserve is expected to keep raising interest rates, tightening the screws on the economy. Central bank officials have been adamant that the economy needs to soften in order to bring down inflation, and that implies more layoffs and weaker consumer demand, which makes it harder for companies to raise prices.

This week, the Walt Disney Company announced changes to its pricing policy at theme parks, an acknowledgment that it may have pushed too hard in pursuit of profit, while FedEx said it would further pare back some weekend delivery services as demand waned for its services.

“Big picture, we care about what is happening with demand and what is happening to companies’ costs,” said Ron Temple, the chief market strategist at Lazard.

Article source: https://www.nytimes.com/2023/01/12/business/corporate-earnings-fourth-quarter.html